As properties within homeowners and condominium associations age, inevitably maintenance expenses will begin to pile up. Roofs will need to be replaced, deteriorating roads will need to be repaired, and siding may need to be replaced. These are examples of major expenses that do not occur every day, but can often otherwise be anticipated. Planning ahead for these expenditures can be key to the financial health of your association.
So how do homeowners and condominium associations pay for these major projects? One method is through reserve funding. This is an amount of the collected assessments that are set aside to pay for some of these larger expenses. Successful and financially sound associations build reserves into their budget so that they have adequate funds to deal with aging community infrastructure. Think of it as saving to pay for college. It is much easier to pay for this major expense if you have been putting aside a little bit each month into your college fund than to have to pay the bill without having saved first.
There is no statutory requirement for an association to fund a reserve account. Both the North Carolina Planned Community Act and Condominium Act (47F-3-102 and 47C-3-102) state that associations may adopt and amend budgets for revenues, expenditures, and reserves and collect assessments for common expenses from lot/unit owners. The Condominium Act (47C-4-103(a)(5)) also states that the public offering statement’s budget must contain a statement of the amount, or a statement that there is no amount, included in the budget as a reserve for repair and replacement. Neither of these statutory sections mandate funding reserves.
While funding reserves is not required, doing so is a wise decision of the Board of Directors, and may help insure the financial health of the association. Should your association decide to fund a reserve account, often the question comes up of how much money to set aside for these reserves. This is not an easy question to answer. The best way to determine the amount to be allocated to reserves is to engage a professional to conduct a reserve study. These studies evaluate all of the association owned property and maintenance obligations. They also look at the current condition of the items that are the maintenance responsibility of the association. In evaluating these factors, a reserve study can attempt to anticipate when certain common expenses will be needed and can estimate how much they may cost. In turn, you can calculate how much should be budgeted for reserves to pay for these expenses. Ideally, a reserve study should be completed when the community is very new, and a new study should be completed every few years to make sure that the amount being allocated for reserves most accurately reflects the projected maintenance needs of the community.
What if a major expense occurs and the association never funded a reserve account? This is a precarious position for the association. Without the advance financial planning of a reserve fund, the association will need to raise money quickly. Sometimes a special assessment may be needed. However, special assessments will likely need to be approved through a vote of the membership. In our experience, this can often be a difficult task. Furthermore, Declarations of Covenants, Conditions, and Restrictions, often place restrictions on what type of expense can be subject to a special assessment. So there may not be a guarantee that a special assessment can be used to fund a particular maintenance project. Another option for associations who need funds quickly would be to pursue a loan through a lending institution. Obviously having adequate reserve funds would be preferable to either of these options.
Planning ahead, through reserve funding, can make the expense of a major maintenance, repair, or replacement project much less burdensome on the association members. Should you have questions about how to best insure the financial health of your community association, contact one of our attorneys at Black, Slaughter & Black, P.A.