A sufficiently funded condominium reserve account is an important part of a properly functioning condominium. With a properly funded reserve account, a condominium is better prepared to meet maintenance, repair, and replacement needs, including unanticipated projects and expenses that may arise, without the need for sudden and potentially large assessments to the unit owners. Condominium reserve accounts are discussed in Massachusetts General Laws, Chapter 183A, Section 10(i):
All condominiums shall be required to maintain an adequate replacement reserve fund, collected as part of the common expenses and deposited in an account or accounts separate and segregated from operating funds. The requirements of this subsection may be modified pursuant to subsection (m) of this section.
In sum, while reserve funding amendments can be a useful tool for funding condominium reserve accounts adequately in compliance with the statute, they are not without complication.
With § 10(i)’s requirement for associations to have an “adequate” reserve account, some trustees and property managers may wonder how best to fund it. The typical solution is to budget for reserve funding as a part of the overall budget and to include in the monthly common expense charge a percentage earmarked for reserve funding. In the absence of budgeting for reserve funding, a supplemental common expense assessment can be collected to fund the reserve, either in a lump sum or to be paid by unit owners over a period of time. Both of these methods are reasonable and generally allowable under most condominium by-laws as powers of the trustees, which means they can be undertaken without the consent of the unit owners.
In addition to these methods, some associations are turning to so-called “reserve funding amendments” to help fund their reserve account adequately. This is an amendment wherein the condominium by-laws are modified to require a contribution to the reserve account upon the sale of a unit. At the time of sale, these reserve funding amendments require the buyer or seller of a unit to pay a fee to the association, which is then deposited into the condominium’s reserve account. In our view, reserve funding amendments are legal and allowable under the Massachusetts Condominium Act, though there is no Massachusetts case law related to them as of this writing.
While reserve funding amendments can be useful, caution is necessary on the part of trustees and property managers before undertaking the cost and effort associated with such an amendment. As with any amendment to the by-laws (or the master deed), unit owner approval is necessary to pass, finalize, and record such an amendment. Most condominium by-laws require the consent of either sixty-seven or seventy-five percent of the beneficial interest of the unit owners in order to amend the by-laws. Obtaining that support for a reserve funding amendment may be difficult. Before initiating the amendment process, a board should try to take the temperature of the unit owners in the association with regard to the effect of the amendment.
Many unit owners may find the idea of paying an additional fee to their association upon the sale of their unit objectionable, especially in light of other closing costs that must be paid at sale. While reserve funding amendments can be drafted such that the fee is charged to the buyer of a unit, buyers may contract at sale to pass the reserve funding fee on to sellers, as is often seen with supplemental common expense assessments due around the time of sale. Therefore, unit owners, especially those planning to sell their units in the future, may be reluctant to support a reserve funding amendment. In the absence of unit owner support, the time and expense of drafting such an amendment would be wasted.
Reserve funding amendments can also be a slow way to fund a reserve account, with the process of budgeting for reserve funding or making a supplement common expense assessment serving to fund reserves more quickly. As reserve funding amendments rely on the sale of units for funding the reserve account, funds are only added upon sales of units. Reserve funding amendments can also be used in conjunction with the budgetary or supplemental assessment approaches, which may result in speedier reserve account funding overall.
A challenge with reserve funding amendments is that an amendment to a condominium’s by-laws is permanent and may only be overturned by another amendment to the by-laws. If the housing market changes direction and unit values go down, a reserve funding requirement may be a burden for unit owners. Or, if an association’s reserve becomes adequately funded, an association may no longer have a need to collect the reserve funding fee. Obtaining the necessary consent of unit owners to pass any new amendment can be difficult in some associations and may prevent recission of a reserve funding amendment. The previously discussed methods of funding reserve accounts by changing the budget or by assessment are typically allowed as powers of the trustees and may be implemented or retracted at the discretion of the trustees, without unit owner approval.
In sum, while reserve funding amendments can be a useful tool for funding condominium reserve accounts adequately in compliance with the statute, they are not without complication. Therefore, as with all potential condominium document amendments, it is a wise decision for trustees and property managers to discuss reserve funding amendments with experienced condominium counsel, including the benefits and drawbacks of such an amendment and the facts particular to the association’s situation.