Calculating Minimum Reserve Contributions
A board of directors or HOA management company needs to consider two things when establishing a minimum monthly or quarterly reserve contribution.
The first consideration is the recommendation of the reserve study company. Most boards and management companies are aware that homeowner associations that have common area, are required by California law to obtain a reserve study at least every three years.
The second consideration is the fact that the Federal National Mortgage Association (Fannie Mae), the nation's largest buyer of home mortgage loans, requires that at least 10% of a condominium association's budget must be allocated to reserves.
The easiest way to calculate the 10% minimum is to follow these steps:
- Add up 100% of all budget items excepting any reserve contribution.
- Divide the total by .9
- This will result in what the total budget should be
- Deduct what the total budget should be from the total of all budget items that excluded the reserve contribution.
- The difference is the minimum reserve contribution.
$99,000 (total budget less reserve amount) / .9 = $110,000 (total budget)
$110,000 less $99,000 = $11,000
Minimum Reserve Contribution = $11,000
$99,000 + $11,000 = $110,000
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