Each year the Board prepares a budget that consists of Operating Expenses that fund the general Association operations such as administration, insurance, painting, cleaning, repairs of common elements, landscaping and snow removal and certain utilities and expenses related to the replacement of Capital Items such as roofs, concrete pavement and certain sewer and infrastructure elements as defined in the Declaration of Condominium Ownership.
In spite of the sales talk of "Maintenance Free Living" residing in a condominium is not maintenance free. The Common Elements have finite life and all portions of the Association will wear out in time due to age and their exposure to the elements and they will need to be replaced. An Association may provide capital reserve funds for the replacement of these capital items. Reserves that are fully funded provide that the persons who are using the elements that wear out are paying for them as they use them. Adequately funded reserves can provide an ongoing source of funds thus reducing the need for special assessments at the time that capital elements need to be replaced.
Oftentimes, an immediate full need special assessment can be of a high value with a limited time for payment homeowners. This can lead to financial instability when a large special assessment is due within a short period of time as the assessment can cause hardships to the budgets of Association owners. Lack of adequate finances or credit on the part of unit owners can cause nonpayment of the assessment leading to delinquencies. These delinquencies after a large special assessment may be a leading cause of liens and foreclosures at an Association.
Advance planning for maintaining multimillion dollar corporate assets - the common elements - demonstrates responsibility in the management of the corporation - the Association - and provides stability for the corporate share holders - the unit owners - when costs are relatively predictable.
The Ohio Legislature responded to many concerns of condominium owners across the state when it acted to revise the Ohio Condominium Law in 2004. A provision of the new law provides specific requirements for reserves for the replacement of capital items. A condominium Board must either adopt a budget with adequate funds to repair and replace major capital elements without the need of special assessments and set aside at least 10% of the total budget for reserves unless the majority of the owners waive the funded reserve requirement each budget year where the possibility of a special assessment exists.
Reserve fund amounts are determined through a reserve study process that inventories capital components, estimates their remaining useful life and calculates a contribution rate to provide the necessary funds at the time that the capital element requires replacement. A professional reserve study is prepared by a firm that utilizes the expertise of the fields of architecture, engineering and financial modeling. The cost of a professional study or compilation ranges between $1,000 to $6,000 for most Associations.
Associations can pay for the replacement of capital common elements through deferred maintenance, which only delays the inevitable, a one time special assessment, increased fees, borrowing from a bank or through a progressive fee increase for capital reserves, where fees are increased by a fixed amount each year over a period of years to reach the goal of funded reserves.
Unit owners, have control over the budgeting process as it relates to reserves through the annual waiver process noted above. The Board of Directors can provide a fiscally sound condominium association through advance long term planning
A media presentation on reserves is also available at the link.