What's in Your Wallet? The Importance of Healthy Reserves

 Unless it's a thoughtful gift or a party in their honor, nobody likes surprises.  That's especially true when it comes to sudden, serious, or non-negotiable  repairs to a condo building or HOA. A community must have enough money saved to  deal with major projects as they arise, or risk major financial and structural  troubles. But economic woes of residents such as unemployment or default, or  living on tight fixed incomes, means more HOAs are finding it difficult to keep  their reserves adequately funded.  

 Having a robust reserve fund is important for those reasons, as well as a newer  one: under the new federal mortgage funding rules courtesy of Fannie Mae and  Freddie Mac, an association must have at least 10 percent of its budgeted  income in a capital reserve fund to be eligible for a loan—or for some prospective buyers to qualify for individual mortgages.  

 The Basics

 Mitch Frumkin, PE, RS, CGP, is founder and president of the North  Brunswick-based engineering firm Kipcon, Inc. “A reserve fund can also be used as a planning tool,” says Frumkin. “If the roof has one year of life left, the manager might say, `I’m going to have to spend that money a year from now, so let’s start getting the specifications and go out to bid.” Frumkin chaired the Community Associations Institute’s (CAI’s) national task force to come up with national standards on reserve studies,  and in 2003 he was involved in the rewriting of the American Institute of  Certified Public Accountants’ chapter on “Future Major Repairs and Replacements” in its Common Interest Realty Associations Guide.  

 How Much?

 How should buildings calculate the appropriate amount for their reserve fund?  Experts agree that the amount of funding is based on how much money the  association projects it will need within a 30-year window, although some  studies will cover 35 or even 40 years. They also say that updates of the study  should be performed every three to five years or so.  

 How is the amount of money needed for a reserve fund calculated? We received  several answers for this. For example, Leonard Barber, CPA, president of  Executive Property Management in North Brunswick, says the variables include  age, expected life span, current condition and replacement cost. Roads and  roofs are often overlooked but should definitely be considered.  

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