“If it ain’t broke, don’t fix it!” The problem is, it will still break tomorrow. Deferred repairs or replacements, as well as deferred funding for such, will frequently challenge all community associations. Substantial delays seriously jeopardize the integrity and value of the association’s assets. Deferred funding only results in increased costs to the owners when a capital improvement expense becomes necessary. The newer the association, the greater the likelihood that these deferrals will eventually lead to underfunded reserves. In Colorado, the average community association reserve funding is only about 40% of what is needed. This means that the association will only have about 40% of the moneys available for a reserve expense at any point in time.
Your governing documents will likely require that a reserve fund be established and maintained, and supported by responsible planning. Although Colorado law does not specifically require an association to maintain a reserve fund, the law does, however, require an association to maintain its assets, collect assessments to pay for this maintenance, and perform its accounting using generally accepted accounting principles. A more recent Colorado law does require that an association, especially one created before 01 July 1992, to adopt a reserve study policy which addresses how often it is to be done and its funding sources.
To not be considered taxable income, the IRS requires that the reserve fund be kept separate from the operating fund, agree to and support the budget, and be allocated to specific major improvements and replacements. Furthermore, the secondary mortgage underwriters, Fannie Mae and Freddie Mac, now require that the reserves represent at least 10% of the annual operating budget.
Adequate reserve funds support the association’s legal and fiduciary requirements to maintain and protect its assets, and, due to increased scrutiny by lenders, buyers and real estate professionals, a well-funded reserve study will only enhance a unit’s resale value.
As an owner of a condominium, it is more equitable to pay your fair share of the cost to maintain and replace the community’s assets. During your ownership, you have “used” these assets and should be responsible for your proportionate use.