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Condo Reserves: How Much is Enough?

November 25, 2015 Posted in Community Association Law

As a condominium board, one of the most important duties entrusted to these elected positions is the proper management of funds derived from annual dues. Under the bylaws of your particular association, there likely exists a set of provisions allowing residents the opportunity to inspect the books and records upon reasonable request.

Moreover, costly litigation can ensue against a condominium board that does not prudently and properly manage income from annual dues – including the extra funds held in case of emergency, known as reserves.

While there is, of course, no magic number required by law, boards must strike a balance between reserving enough money to handle foreseeable issues, and not over-taxing residents with excessive mandatory dues. And, of course, any board member tasked with overseeing the condominium reserves account should be properly vetted and (ideally) experienced with handling large sums of money for the benefit of others.

Are Reserves Mandatory?

While a handful of states actually require minimum mandatory reserves for the upkeep and maintenance of common areas, New Jersey and New York do not maintain such laws. Rather, the statutes in both jurisdictions allow condominium boards to make a discretionary decision over whether reserves are necessary and, if deemed so, how much will be required to keep common areas secure, safe and well-maintained.

Under Section 46:8B-15 of the New Jersey Revised Statutes, condominium associations choosing to open a reserves account may do so “for a share of common expenses or otherwise, including any other moneys duly owed the association, upon proper notice to the appropriate unit owner.”

In New York, condominium boards may elect to maintain a reserves account “to provide for major and minor maintenance, repairs, additions, improvements, replacements, working capital, bad debts and unpaid common expenses, depreciation, obsolescence and similar purposes.”

How Much to Withhold?

Deciding how much to withhold for reserves will depend on the individual needs and expenses of the property itself, with smaller properties likely requiring a smaller reserves amount. However, if a particular property is exceptionally old, includes high-value items in common areas (e.g., imported marble flooring or solar panels) or is prone to damage from natural weather events, it may behoove a board to require a higher annual or quarterly dues amount from residents.

If an expense becomes immediately necessary and there are insufficient funds in the reserves account, it will be necessary to call a meeting with residents to vote upon the best course of action. If a recent catastrophe has rendered a portion of the property unusable, the board will need to find ways to immediately remedy the problem – which may require a request for immediate extra dues or permission to pursue short-term financing.

If, on the other hand, the board anticipates increased expenses down the road, it may seek approval from residents for a gradual increase in annual dues, so as to help reduce the “sticker shock” of a sudden and drastic annual increase.

Contact a New Jersey and New York Condo Association Lawyer Today!

If your board is considering an increase in annual reserves funding, or you would like to discuss the best ways to insure against wear-and-tear or sudden damage, contact a condo association lawyer today by calling our New Jersey office at (973) 366-1188 or our New York office at (212) 374-9790!

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