Q&A: Reserve Fund Start-Up

Q How do we start a reserve fund? Where does the money come from? What can we or can’t we use the money for? Must we get approval from shareholders/owners in order to spend the reserve fund?

—Board Member at a New Condo

A “Many condominium documents and homeowner association documents describe the creation of a reserve fund. The idea of a reserve fund is to save money for expensive repairs that will inevitably have to be made in the future,” says Stuart Lieberman, Esq. of Lieberman & Blecher, P.C. in Princeton. “This could include roofs, sidewalks, tennis courts and swimming pools.

“Often, the governing documents will identify the kinds of financial instruments that can be used in order to grow the fund. In general, these will be secure, less risky kinds of investments, such as highly rated bonds, and low risk stocks. While the return may not be as great with these investments, they are secure and the money will most likely be available when it needs to be spent for the specified purposes.

“Whether or not your governing documents require a reserve fund, it is something that I generally recommend. This is the classic rainy day fund. If you don’t have a fund, these kinds of repairs can be very expensive and can lead to the need for special assessments in the thousands of dollars. A good reserve fund is a way to guard against very high special assessments.

“I recommend two kinds of experts in order to start a reserve process. The first is an engineer who can review the common elements and publish a schedule indicating the projected lifespan of the various expensive components of the common elements and determine likely costs of repair to, or if necessary (as in the case of roofs), replacement.

“With that schedule in hand, I would also recommend consulting with a trusted financial advisor. That advisor will help create a portfolio that will meet the kind of structure proposed by your engineer.

“The money will come from an increase in the maintenance fees that are charged to the unit owners. It can be spent for those items that are described as requiring a reserve in the governing documents. If the governing documents do not detail this information, state law may also provide an answer.

“Since this is a part of the maintenance responsibilities that are entrusted to the board of trustees, usually special permission to make an expenditure from the reserves is not required as long as the expenditure is for one of the things either provided for in the governing documents or in state law.

“In the final analysis, it is almost always a good idea to have a reserve fund. Since some of the particulars vary from state to state, make sure you consult with the board attorney to make sure your reserve fund is both healthy and legal.”

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