That Doesn’t Count Towards the 10% Reserve Contribution
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) require 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 is 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.
Image courtesy of stuartmiles/freedigitalphotos.net
The Condominium Project Approval Team at ReadySetLoan is dedicated to helping condominium projects across the nation to obtain their approvals with FHA and the VA or become recertified with FHA. We have assisted nearly 200 condominiums and we can help your association.
ReadySetLoan is an active member of the Connecticut and New England chapters of the Community Associations Institute (CAI) and is a frequent contributor to Common Interest Magazine as an expert in FHA/VA condominium project approvals.
Please contact us with any questions regarding FHA or VA condominium project approvals. You can email me at email@example.com or call me at 404-433-4565. I will be happy to answer any of your questions.
FHA/VA Condo Approval Specialist
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Check out our article in Common Interest magazine on page 19!