Homeowner Associations Must Have Adequate Replacement Reserve Fund

New in 2012 is the state requirement for Minnesota homeowner associations to have an adequate replacement reserve fund.

An important concern for townhome and condo buyers has always been the strength of the reserve fund... how much is it and is it enough to cover repairs and replacement costs when needed or will there be special assessments? 

Although associations have been required to include reserve funds in their budgets since 1994, many associations have faced significant financial challenges in recent years and many associations have failed to adequately fund their reserve accounts or have 'borrowed' reserve funds to cover operating expenses.

Effective January 1, 2012, Minnesota Statute 515B.3-1141 requires that a separate and adequately funded replacement reserve fund be in place. Although not specified, in most cases this would include a long-term repair replacement plan for common elements with a life expectancy of less than 30 years.

"The association shall include in its annual budgets replacement reserves projected by the board to be adequate, together with past and future contributions to replacement reserves, to fund the replacement of those components of the common interest community which the association is obligated to replace by reason of ordinary wear and tear or obsolescence."

See the statute itself for specifics, below is a summary of key elements.

• Must be able to repair or replace components such as roof, siding, common heating plant, common areas, etc that are the responsibility of the association based on the estimated useful life of each component
• Funds can come from regular dues or special assessments or other means, but the plan must specify where the funds are coming from
• Reserve funds must be kept in a separate account, not part of the general fund, and reserve funds cannot be borrowed to cover a shortage for operating expenses but can be used as collateral for a loan to the association
• Plan must be reviewed every 3 years

If you are purchasing a common interest property governed by an association, make sure you are provided with a replacement reserve plan as part of the association documents. Failure to have adequate reserves may affect ability to finance the project.

Sharlene Hensrud, RE/MAX Results - Email- Minneapolis Condo and Townhouse Realtor