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 – 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) Resource Center > Law & Legislation

Condominium Administrative Rules - R 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 – Building Reserves Kevin Bobb – Quickreserves ( )

Reserve Study – Self Help How to start a self study if you should choose to undertake this task? Future Calculator Site

Sample Reserve Study XYZ Condo Association Roofing StudyCurrent AgeYears LeftCurrent Future Building #1155$5,500$6,072$1, Building #2173$7,500$7,959$2, Building #3182$4,800$5,092.32$2, Annual Reserve Contribution $6, $ 3, $ 1,214.40

Managing a Reserve Fund (Sample forms in handout)

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