Condominiums are an integral part of the urban housing landscape. They offer equity-building opportunities, extensive community amenities, and iconic architectural styles. Condo ownership is on the rise in places like Houston and across Texas. This makes the topic of association reserves especially timely. In this two-part blog post, RISE Association Management Group covers condo association reserve fund guidelines all board members must know.
The tragic collapse of Champlain Towers in Surfside, Florida highlighted an existential threat looming over condominiums of all ages: underfunded infrastructure. Resident safety must always be at the forefront. This issue raises a vital question for condo boards, managers, owners, and prospective buyers – how much should a condo association have in reserve funds to adequately address infrastructure needs?
Association funds and underfunding
Underfunding is pervasive among condos, regardless of their age. A lack of understanding about longrange infrastructure needs often leads to underfunding. The two main reasons include:
- Insufficient Visibility: Buildings require regular maintenance; not all needs are clearly apparent. Without a long-range plan or reserve study, boards may believe they have sufficient funding, leading to a shortfall.
- Insufficient Reserves: Every building and every community is different. Since there is no one-sizefits-all formula, insufficient reserves can deter buyers, creating a situation where funding is continually inadequate.
New condo reserves law
The Federal National Mortgage Association, commonly known as Fannie Mae, implemented new guidelines, effective August 2023. The guidelines require appraisers to focus more on safety and infrastructure. RISE wrote about this in detail. Highlights of the new Fannie Mae project review requirements include examining significant deferred maintenance, as well special assessments and condominium loans. This could result in severely limiting financing options for buyers, and create an onerous underwriting process for lenders and appraisers.
Condominiums operate more like small cities, with a board making financial decisions that impact ongoing maintenance, budgets, and special projects. Condo boards must balance short-term interests with long-term funding plans. This can be challenging in the face of conflicting perspectives and visions. Working with HOA management companies like RISE can reduce or eliminate individual interests that may overshadow the collective goals of the board.
Another solution may lie in legislative action, requiring reserve studies and balanced long-range funding plans to be disclosed as part of any real estate transaction. This will allow buyers, lenders, and the market to properly assess the value of a sufficiently funded reserve.
The optimal reserve amount
Determining the exact reserve amount is complex and must be tailored to each condo’s specific needs. However, the condo reserves rule of thumb should involve:
- Obtaining a Reserve Study: Working with a firm experienced in developing condo reserve studies will provide insights into long-range infrastructure funding needs.
- Creating a Long-Range Funding Plan: The condo board should review this plan annually and use it as a guide for budgeting.
- Consulting with Professionals: Engaging experts in reserve planning and long-range funding can aid in determining the right reserve levels tailored to each condominium’s needs.
By taking these steps, condominium associations can better prepare for major infrastructure investments, ensuring they do not face financial reckoning down the line. The time to act is now, especially with the looming impact of new lender guidelines, to ensure that condominiums continue to serve as beautiful and functional housing solutions for all.
Be sure to stay tuned for Part II of our Association Reserves topic – condo special assessments and loans.
Want to learn more about a condo reserve study? The professionals at RISE are here to make your job easier. Contact us at [email protected].