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 Upon
Revenues 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 for
Spending 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 Site
www.uic.edu/classes/actg/actg500/pfvatutor
Sample Reserve Study
XYZ Condo Association
Roofing
Study
Current Age Years Left
Current
Future
2014
2015
2016
Building #1
15
5
$5,500
$6,072
$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
2017
2018
$ 1,214.40 $ 1,214.40
$ 1,214.40 $ 1,214.40
Managing a Reserve Fund
(Sample forms in handout)
Thank You For Attending!
CummingsManagement.com
Toll Free: 800-965-5292
6190 Taylor Drive
Flint, MI 48507