Condominium Reserve Accounts vs. “Statutory Reserve Accounts”
For a condominium community, the best way to prepare for that inevitable expensive repair is to have a reserve fund. Otherwise, when those big ticket repairs need to be made – like replacing roofs or concrete areas – there will be no money to pay for them, and every unit owner will receive a walloping special assessment instead. The condo association might be able to get a loan to cover a periodic large repair cost, but loans to condo associations are not always available.
And loans still need to be paid off, with interest.
Creating a condo reserve fund
With a condo reserve fund, modest amounts are collected from owners over a long period of time. Then when it is time to make the repair, the money needed is already in the association’s account. Instead of paying interest to a bank or inflicting special assessment misery, the association will have the money it needs when needed, and earn a little interest on the reserve along the way.
There are challenges to figuring out how much to collect from owners for the reserve, like estimating how long exterior paint will last or when decks will need to be replaced. But using the approach of a reserve fund, any challenges can be faced calmly, rationally and with ample time to make good judgments. Reserve funding decisions are easier to deal with than owners who will not vote for a special assessment to make a major repair that is only going to get more expensive as time passes.
Should your condo association have a statutory reserve account?
Once a condo association decides to set aside reserve funds earmarked for major repairs, a second question is whether the association should have a “statutory reserve account.” In Wisconsin, a “statutory reserve account” is defined at Section 703.163 of the Wisconsin Statutes. If an association has a statutory reserve account, the board of the association must:
- Budget annually to assess owners for contributions to the reserve fund using at least the four factors listed in the statute to determine how much;
- Create an account separate from the association’s operating account to hold the reserve funds;
- Use the reserve fund only for other than routine maintenance (unless 2/3 of the unit owners provide their written consent to allow use of the funds for routine maintenance and those funds are replaced within three years); and
- Cautiously invest the reserve fund according to state statute.
Wisconsin condo law
Wisconsin condo law on statutory reserve accounts was first effective in the year 2004. Condo communities already in existence on November 1, 2004, were supposed to create a statutory reserve account unless a majority of the unit owners voted against having a statutory reserve account. Whichever the association decided, the association was supposed to record with the local register of deeds a “statutory reserve account statement.”
A statutory reserve account statement is a document recorded at the register of deeds which provides public notice either that the association:
(1) Has a statutory reserve account, or
(2) Does not have a statutory reserve account. If the association has no statutory reserve account, it must state how the association will pay for the future repair and replacement of common elements.
Responsibilities of condo developers vs. condo owners
A condominium community first governed after November 1, 2004 by the buyers of the units, the developer (also called the “declarant”) was supposed to file the statutory reserve account statement indicating whether the association has a statutory reserve account. If the declarant chose for the association to have a statutory reserve account, the association will continue to have a statutory reserve account unless a majority of the new owners vote to not have a statutory reserve account.
If the owners vote to end the statutory reserve account, another statutory reserve account statement has to be recorded. This statement would provide public notice that the condominium community does not maintain a statutory reserve account and explain how the association will pay for future big ticket repair costs without one.
If the declarant chose for the condo association not to have a statutory reserve account, then right after the unit owners take over the association, they are supposed to hold a vote on whether to operate with a statutory reserve account or not. The majority of unit owners decide the question. If the owners vote for a statutory reserve account, a statutory reserve account statement is supposed to be recorded confirming the choice.
Operating without a statutory reserve account
There are many condo associations that have chosen to operate without a statutory reserve account but they do have a reserve fund. Reserve funds may be held with operating funds and designated in the association’s books of account as earmarked for non-routine replacement and repairs. Or the association’s reserve funds may be kept in a separate “reserve account,” not subject to the statute’s restrictions on how the funds should be invested. (Although it is a good practice for associations to invest reserve funds conservatively so as to preserve them.)
The most important point is that the condo association should maintain a reserve fund to cover expensive, periodic repair or replacement needs. If the association adopts a statutory reserve account to hold its reserve funds, the law imposes certain logical requirements. Every condo association should have recorded a statutory reserve account statement providing accurate public notice of the type of reserve fund the association maintains. If the status of your association’s reserve fund is not clear, contact us for help.