In addition to annual operating expenses, the budget for condominiums and cooperatives MUST include reserves for capital expenditures and deferred maintenance. Mandatory reserve categories include: roof replacement, painting, pavement resurfacing and any other item for which the maintenance expense or replacement cost exceeds $10,000.
In an HOA, the budget MAY include reserve accounts for capital expenditures and deferred maintenance for which the association is responsible. However, the association is not required to include reserve amounts in its budget unless such reserves were established by the developer OR approved by the association members.
Amounts for reserve items must be computed using a formula which is based on the estimated remaining useful life and estimated replacement cost or deferred maintenance expense of each reserve item.
Reserve funds and any interest accruing thereon MUST remain in the reserve account or accounts and MUST be used only for authorized reserve purposes unless their use for any other purpose is approved in advance by a majority of owners (for condos and HOA’s) and by 3/4 of owners (for a cooperative association) at a duly called meeting of the membership.
The members of an association may partially or fully waive funding of reserves by a majority vote at a duly called meeting of the association. However, a vote to waive reserves is only effective for the fiscal year proposed and a new vote must be conducted each year that the membership wishes to waive reserves. In a condominium association, proxies and ballots related to waiving reserves (partially or fully) must contain bold disclaimer language cautioning owners that they may be subject to a special assessment as a result of such waiver.
In an HOA, once an association provides for reserve accounts in the budget, the association must thereafter maintain and waive reserves in the same fashion required for condominium associations.
Most years there is a legislative attempt to remove the ability to waive reserves in common interest ownership communities which has been resisted vehemently by associations who wish to decide for themselves whether or not they wish to save for a rainy day. Personally, I am a saver so I am a fan of reserves but I also appreciate the countervailing argument given by many that they would rather spend funds at the absolute moment they are needed and not a minute before.
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