Tapping Your Reserves:  When and How

1.         How much reserve are you supposed to have?

            A.        What the law says:

            1)         The Michigan Condominium Act:

MCLA §559.205 Reserve fund.

Sec. 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.

            2)         The Regulations:

Rule 511. (1) The bylaws shall provide that the association of co-owners shall maintain a reserve fund for major repairs and replacement of common elements in accordance with section 105 of the act. The co-owners’ association shall maintain a reserve fund which, at a minimum, shall be equal to 10% of the association’s current annual budget on a noncumulative basis.

(2) The funds contained in the reserve fund required to be established by section 105 of the act shall only be used for major repairs and replacement of common elements.

(3) There shall be set aside the amount of funds required by subrule (1) of this rule by the time of the transitional control date. The developer shall be liable for any deficiency in this amount at the transitional control date.

(4) The following statement shall be contained in the bylaws: “The minimum standard required by this section may prove to be inadequate for a particular project. The association of co-owners should carefully analyze their condominium project to determine if a greater amount should be set aside, or if additional reserve funds should be established for other purposes.”

            B.         What the typical Condominium Bylaw says:

Reserve fund. The association shall maintain a reserve fund, to be used only for major repairs and replacement of the common elements, as required by MCLA 559.205, MSA 26.50(205). The fund shall be established in the minimum amount stated in these bylaws on or before the transitional control date and shall, to the extent possible, be maintained at a level that is equal to or greater than 10 percent of the current annual budget of the association. The minimum reserve standard required by this provision may prove to be inadequate, and the board shall carefully analyze the project from time to time to determine whether a greater amount should be set aside or if additional reserve funds shall be established for other purposes.

2.         How to fund capital improvement if you do not have sufficient reserves to pay for it.

            A.        Additional v. Special Assessments:  the typical condominium bylaw

                        provides:

                        1)         Additional assessment—levied by the board without a vote of the

                                    co-owners:

                                    a.         Annual assessment insufficient to pay costs of operation,

                                                management, and maintenance of project.

                                    b.         To provide for replacements of existing common elements

                                    c.         To provide additions to the common elements not exceeding

                                                [a specified dollar amount] in the aggregate annually

                                    d.         In the event of emergencies

                        2)         Special Assessment—requires a vote of the co-owners:

                                    a.         Additions to common elements exceeding [a specified dollar

                                                amount]

                                    b.         Assessments to purchase a unit in the event of foreclosure

                                    c.         Assessments to purchase a unit for use by a resident

                                                manager

                                    d.         Assessments for any other purpose not otherwise described

3.         Where to keep the money

The Board has a duty to exercise that care an ordinarily prudent person would use in the management of his own financial affairs when managing the association.

            A.        Possible vehicles:

                        1)         Certificates of Deposit

                        2)         Money Market Accounts

            B.         Vehicles to avoid:

                        1)         Treasurer’s favorite stock

                        2)         Junk bonds

                        3)         Uninsured investment vehicles