It’s budget season for many condominiums who run on a calendar year and we have run across an issue with several of our clients and potential clients. Everyone knows that FHA (and Fannie/Freddie) requires that a condominium contribute 10% of its budget to the reserve fund each year. So when don’t the contributions count towards the 10%?
When the funds are already delegated to fund an existing liability. We have seen this many times but let’s take a recent example:
A condominium client’s budget is $450,000 so the minimum that they should be transferring annually to reserves is $45,000. On the budget, the reserve transfer line item is $130,000. So they should be good, right? Not in this case. What the operating budget doesn’t show is that the association’s loan payments are made from the reserve account…loan payments that total $128,500 annually.
This means that out of the $130,000, the actual reserve contribution is $1,500, far shy of the required $45,000. The $128,500 in loan payments are an existing liability so this part of the reserve contribution has already been spent.
It doesn’t matter whether or not the Association is paying for the loan from the Operating or Reserve account. The liability exists and the Association must budget for it plus the 10% reserve contribution.
Thus, at the moment, this Association is not eligible for FHA Condominium Project Approval. It will have to include both the loan payment and the 10% contribution for its budget for 2016 unless it can provide a reserve study which indicates that the current level of reserve funding is adequate.
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