The Risk of Failing to Build Reserves

Presenter:

Kay Bushey

Seminar Goals

1. How to locate the legal guidelines

2. Possible risks of no reserves

3. How to approach a reserve study

Reserve Guidelines

What is the 10% Rule?

Where do we find the Rule?

Association By-laws

Rules pertaining to reserves within the association are “usually” outlined in the Assessment section.

State Condo Act – 559.205 Reserve Fund

Section 105. A reserve fund for major repairs and replacement of common elements shall be maintained by the associations of co-owners. The administrator may by rule establish minimum standards for reserve funds.(Effective July 1, 1978)

www.CummingsManagement.com

Resource Center > Law & Legislation

Condominium Administrative Rules - R 559.511

DEPARTMENT OF CONSUMER AND INDUSTRY SERVICES

BUREAU OF CORPORATIONS, SECURITIES AND LAND DEVELOPMENT

MOBILE HOME AND LAND RESOURCES DIVISION

CONDOMINIUMS

In 1985 Administrative Rules were created to provide additional guidelines to the Michigan Condo Act for the association of co-owners.

Are Budgets Based UponRevenues or Expenses?

Cummings Policy:

Budgeted Revenues and Expenses are “equal” to each other.

This policy eliminates the worry of interpreting what the budget is.

Possible Risks

Cancellation of Directors & Officers Insurance

Cancelled Real Estate closings Loss of FHA approval Future additional assessments

Amount of Reserve Fund

What items need to be evaluated to determine an adequate amount for the reserve fund?

Non-repetitive maintenance items Roofs Roadways Sidewalks Pools Mechanical components (boilers/pumps)

IRS Guidelines forSpending Reserves

IRS does reserve the right to evaluate if reserves are spent on qualifying items.

IRC Section 118 (Internal Revenue Code) defines reserve fund and could require an association to produce a “reserve study” to support the fund. One item that is clearly exempt/non-qualified is “painting.”

Note: The failure to follow these guidelines could result in “taxation” of the accumulated funds.

Reserve Studies

There are many organizations who could provide a reserve study for your use. Associations may also choose to tackle this task on their own. The difficult task is to “annually” fund the reserve account.

Reserve Study Specialists

Reserve Advisors

Nik Clark – 800.221.9882

Building Reserves

Kevin Bobb – 877.514.8256

Quickreserves

www.quickreserves.com (888.527.1700)

Reserve Study – Self Help

How to start a self study if you should

choose to undertake this task?

Future Calculator Sitewww.uic.edu/classes/actg/actg500/pfvatutor

Sample Reserve Study

XYZ Condo AssociationRoofing Study Current Age Years Left Current Future 2014 2015 2016 2017 2018

Building #1 15 5 $5,500 $6,072 $1,214.40 $ 1,214.40 $ 1,214.40 $ 1,214.40 $ 1,214.40

Building #2 17 3 $7,500 $7,959 $2,653.00 $ 2,653.00 $ 2,653.00

Building #3 18 2 $4,800 $5,092.32 $2,546.16 $ 2,546.16

Annual Reserve Contribution $6,413.56 $ 6,413.56 $ 3,867.40 $ 1,214.40 $ 1,214.40

Managing a Reserve Fund

(Sample forms in handout)

Thank You For Attending!

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