FAQ: How Much Money Should a Condo Have in Reserves?
Maintaining a healthy condo reserve fund is part of a board’s fiduciary duty. Unfortunately, many associations fall short and underfund their reserves, which can lead to serious consequences. How much money should a condo have in reserves? Keep reading to find out and learn more about condo reserve requirements.
What is a Condominium Association?
A condo association is a non-profit governing organization comprised of individuals who own a unit in a condominium development. Much like a homeowners’ association (HOA), an elected board of volunteers often runs the condominium association on behalf of all owners.
In a condominium association, the individual owners own a percentage of all shared property. Condominium owners are typically responsible for maintaining elements that serve their individual units, such as pipes, appliances, windows, and HVAC systems. In contrast, the condo association is responsible for maintaining items that serve multiple units, such as community amenities, parking lots, roofs, exterior painting, balconies, grounds, and clubhouses.
Condo Reserve Funds
What is a condo reserve fund?
A condo reserve fund is dedicated money that’s set aside by a condominium association to pay for future replacements and major repairs of common elements.
Condo reserves are primarily funded by a portion of member fees and assessments. Additional funds can be generated from interest and returns earned on existing reserve funds.
Is it good to have a reserve fund in a condo?
Yes. A condominium reserve fund is your community's way to plan and prepare for inevitable big-ticket repairs and updates. A healthy condo reserve fund is crucial for long-term planning and required by law in many states. If an unexpected event occurs and sufficient funds aren’t set aside, a special assessment may be issued.
Case Study: The Consequences of Underfunded Reserves
When Cities Management, an Associa© company, took over management for a Minnesota-based community, it was struggling with overdue bills, delayed upkeep, and compliance issues. Due to the deferred maintenance, the association had to issue a total special assessment of $26,000. The Cities team stepped in, made maintenance a top priority, and developed a budget to help the community adequately fund reserves according to their reserve study. If the association had appropriately funded reserves and conducted regular reserve studies, this financial strain could’ve been avoided.
What can condo reserve funds be used for?
How a condo can use reserves varies. In most cases, reserves can’t be used for regular, everyday expenses. Condo reserve funds are usually for covering large-scale issues with common elements, including:
- Roofing
- Exterior walls
- Facades
- Elevators
- Boiler or HVAC systems
- Pools
- Clubhouses
- Landscaping/Irrigation
- Parking structures
- Plumbing
- Electrical systems
Always review your governing documents and state laws before allocating any reserve funds.
RELATED: The Complete Reserve Fund Handbook
Condo Reserve Studies
What is a condo reserve study?
A reserve study for a condo looks at the property and reserve account and analyzes all anticipated capital improvements and repairs. For instance, if your community’s clubhouse requires a roof replacement every 10 years, the reserve study will recommend how much money and at what rate the association should save to carry out the repair on time.
A typical condo reserve fund study is comprised of two parts: a physical analysis and a financial analysis.
- Physical Analysis: This evaluates the current condition of the condo association and estimates the repair and replacement costs for major components in common areas.
- Financial Analysis: This assesses the current reserve fund status and recommends an appropriate rate for condo reserve contributions.
How much does a condo reserve study cost?
The cost of a condo reserve study varies by the size, complexity, and location of your community. The general range is $2,000 to $7,000. Reach out to a local reserve specialist for reserve study pricing in your area.
How Much Should a Condo Have in Reserves?
A healthy reserve fund for a condo is based on advice from a professional reserve study, but as a reserve rule of thumb, it’s ideal for the account to be 70-100% funded. On average, condo associations should allocate between 20 and 40% of their total assessments towards reserves.
However, there are FHA condo reserve requirements. To obtain Federal Housing Administration (FHA), Fannie Mae, or Freddie Mac loans, a condominium association must allocate at least 10% of its annual budget to fund replacement reserves and capital expenditures.
RELATED: A Guide to Getting Your Condo Association FHA Approved
Go Beyond Condo Reserves
Having sufficient condo reserves is essential to the success of your community. When you follow the condo reserve fund guidelines, your board demonstrates good stewardship of funds, and your community is better prepared for the unexpected, making it more attractive to buyers and lenders.
Want to learn more about the ins and outs of condo associations? Check out our blog, “8 of the Top FAQs About Condo Association Insurance.”
Condo Reserves FAQs
What does a 70% funded reserve mean?
A 70% funded reserve means that a condo association has set aside 70% of the money needed to pay for projected replacements and repairs.
Are condo reserve funds taxable?
No. Since condo reserve funds are held for future use, they typically aren’t considered taxable income. However, the association may be required to pay taxes on interest earned from reserve funds. Consult an attorney or tax professional for specific guidance.
What is the new Florida law regarding condo reserves?
After the Champlain Towers collapse in 2021, Florida enacted laws requiring:
- Multi-story condominiums to conduct a Structural Integrity Reserve Study (SIRS) every 10 years
- Mandatory milestone inspections for older buildings
- Fully funded reserves for structural components (effective January 1, 2026)
- Enhanced disclosures and inspection reports
- And more
Contact a condominium association attorney for further information and guidance.
WEBINAR: Overview of Statutory Changes Impacting Condos (HB 1021)