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Be Prepared - You Can't Avoid Disasters
By: Nena Groskind

“The worst mistake a condominium association can make in dealing with a disaster is failing to plan for one.” That advice, worth heeding from any source, is particularly noteworthy coming as it does from Houston attorney Marc Markel. His Houston-based firm, Roberts Markel Weinberg Butler Hailey, represents more than 1,000 condo associations in the Houston area, most of which were affected, some of them disastrously, by Hurricane Harvey, a category 5 storm that struck the city in September, causing billions of dollars in damage, from which the city and its residents are still recovering.

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Reserve Funding

Question: Our board is debating reserves, specifically, how much we should be contributing to that account for our Massachusetts condominium association. Some say the reserves are over-funded; others say the funding level is too low, but no one seems to know exactly what the funding level should be. Are there statutory requirements we have to meet or, if not, best practices we should follow in this area?

Answer: The adage about not being too rich or too thin applies, with reasonable limits, to condo reserve accounts as well. While it is theoretically possible to have a larger reserve than you need, most industry executive say they have never encountered a community association where that was the case; under-reserving is by far the more serious problem. There are no statutory requirements your condominium associations must meet. The Massachusetts condominium law – one of the few statutes to address the issue at all ─ simply says reserves must be “adequate.”
Secondary market requirements provide some guidance. The Federal Housing Administration requires condominiums to contribute 10 percent of their annual budget to reserves each year to be eligible for FHA certification – a prerequisite for obtaining a mortgage or refinancing one with a lender that sells loans to Fannie Mae or Freddie Mac. If your association’s operating budget is $200,000 – reflecting the common are fees owners pay – you should be contributing $20,000 a year to your reserves. If you do, you will meet the FHA requirement, but you won’t necessarily be meeting your community’s reserve funding requirements, Kenneth Bloom, CPA, a partner in Bloom Cohen Hayes LLC, cautions.
The FHA’s 10 percent requirement “is an arbitrary number, chosen by regulators who aren’t involved in managing condominium communities,” Bloom says. “There’s nothing magical about it.” That benchmark may actually be counter-productive, he says, because it creates a false sense of security in communities whose funding needs may be much greater than the FHA guideline requires. The guide associations should use, he says, is the community’s reserve study, which estimates the useful life of critical components (the roof, the HVAC system, siding, elevators, etc.), projects the cost of replacing them, and based on those projections, estimates how much owners should contribute to reserves each year to meet the association’s capital repair and replacement needs. For reserve planning purposes, Bloom says, “there is really no substitute” for the reserve study.
Critics will point out that the study’s projections aren’t 100 percent accurate, and that’s true, Bloom concedes. “When it’s time to redo the asphalt or replace the roof, you almost always discover that it costs more than the reserve study projected. It’s an imperfect science,” he adds. “No one can perfectly predict future costs. There are too many variables.”
But even if the reserve estimate turns out to be only 70 percent or less of what you need, Bloom notes, “that’s still going to give you a cushion,” reducing the size of the loan the association will need or the special assessment the board will have to levy on owners to cover the costs.
“Over time, you’re going to have to pay whatever it costs to maintain the community,” Bloom says. “You can’t control whether you’re going to need a new roof; you can only control how, or if, you plan for it.”

 
 

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