Member Iniation Fee to Fund Reserves

Background: Our condo association consists of 12 units, one membership per unit. The association is relatively new as all units are less than 5 years old and half of the units are less than 2 years old. Our current reserve funds are negligible. Our condominium association is responsible for maintaining, repairing, and improving the grounds all building exteriors. We have no clubhouse, pool, storage buildings or any other major association assets. Regarding reserve funding, our association’s primary objective is to have funds available to cover major repairs and improvements. An evaluation of projected reserve expenses over the next (approximately) 15 years, indicates that we will need at least $100,000 and probably considerably more. Major expenses considered are roof replacement, and siding replacement.

I have submitted to our board, a proposal to generate a significant reserve for our association, as follows:

Assess a $2,000 membership fee to each member/unit with the proceeds going directly to the reserve fund. The fee would be due within 6 months of billing. This fee would effectively function same as an initiation fee. When any unit is sold, a fee of $2,000 would be charged to the buyer and due at closing. The (current association member) seller would (upon receipt of $2,000 from the buyer) be fully refunded their $2,000 membership fee. This process would generate a $24,000 baseline for the reserve fund, providing a very good foundation on which to build an association reserve. The rest of the (projected) funds needed would then be generated by monthly membership dues.

If adopted, this proposal would allow the association to avoid the wasteful expense of interest on money borrowed to cover expenses. In fact, the funds would draw interest until used. This would also facilitate the association’s ability to respond expediently to any urgently needed repairs, as the funds would already be there.

Criticism of this proposal is that “the market would not bear the $2,000 fee due at closing”. I disagree with that assessment in that any buyer could be informed that they are receiving value for their $2,000 in that they will buying an equal share of an association that is on stable financial ground. And that they will likely avoid being blindsided by future major association expenses. I think the “pay me now or pay me later” adage applies here.

I would be grateful if (HOA-Talk) members would comment on this approach. It would be especially appreciated if members who have been at this for more than 10 years would comment.

I strongly disagree with the "initiation" approach.

The one-time $2000 approach makes sense. Over the next 14 years, each owner needs to contribute $40.00 per month or $480 per year to finally reach the $100K after 15 years. Now that is not counting inflation or additional items over time.

If your largest expense is the roof, look at a yearly roof maintenance program that will help extend it's life. Being in a cold weather part of the country, not sure if that will help or not. I have done that in California with properties and have gotten an additional ten years on the roof. That's money in the bank.

Being 12 units, you're in a tougher situation than many others. If an emergency arose, and unless rules have changed, your building couldn't qualify for an SBA loan. The minimum is 25 units, last I checked.

Sounds like a bad idea. Your goal seems to be to shift the responsibility for funding the reserves from current owners to future buyers. What is your plan if there are no future buyers?

The owners need to take responsibility for their own futures. Start funding the reserves now and do not rely on future sales that may never happen.

I think your system is unnecessarily complex. Make the assessment, and put whatever name on it you want, although "special assessment" works for me. If current owners want to recoup some or all of that from future buyers, let them build it into the sales price or otherwise work it out with them, there seems to be no reason for the association to be in the middle of it.

I would offer two points to consider. First, governing documents can and should address this. My highrise condominium calls it a Working Capital Contribution. If your governing docs are silent on this, you should consider a special assessment for current owners to pay a WCC into reserves, then amend your governing docs to require new owners to pay a WCC at the time of closing. The exact amount of the WCC is your call. Amendments are not always easy to approve though.

Second, major repairs/replacement can occur with unexpected timing. For example, the 20-year roof may need full or partial replacement in 10 or 12 years. Building up reserves is critical for every HOA as special assessments take time to accumulate the money needed while the need for repairs/replacement are immediate.