In recent years lending institutions have become much more restrictive in approving and/or insuring loans for common interest communities. The FHA approval list has fallen by about 50% over the past 4-5 years. This has been due to a variety of reasons including new more restrictive Reserve Allocation requirements, owner occupancy standards and extensive documentation requirements.

Impact on Market Appeal

It has been our experience than many projects have seen declining marketability as financing options have dried up for Buyers. With rising real estate prices across the board this typically means the units in these community are increasing at a lower rate than units in communities which are approved with all the aforementioned institutions. Note that FHA insures the financing for over 40% of condominium transactions in the United States and altogether with Fannie Mae, Freddie Mac and VA these institutions finance and/or insure over 90% of all the loans in the United States. Without these options Buyers & Sellers often rely on Cash Only terms which typically have a devastating impact on values.

The 10% of Assessment Income Requirement

Each of the aforementioned institutions require a minimum 10% of an Associations annual Assessment Income collected to be allocated to the Reserve Account. When calculating this amount take note of the below two examples:

*When the 10% Does Not Count*
When calculating this 10% the amount being paid to an existing liability, such as a loan, is not to be counted in the 10% allocation rate.

Example 1:

Bona Vista Condominiums collects $100,000 in annual Assessment Dues from its membership.

Amount being Allocated to the Reserve Account:                                        $30,000
- Loan Payment from Either the Operating or Reserve Account:               - $25,000

=          Total Accepted Allocation:                                       $5,000    

In the above example Lenders will consider only $5,000 allocated to the reserve account due to them taking into consideration the payment of a loan. This equals 5% of the total collected and is not sufficient to meet Lender requirements of 10%. Associations are required to budget for any liability plus a 10% minimum allocation to the Reserve Account.

**When the 10% Does Count**
The 10% allocation rate does not mean it cannot be spent in that same year it is collected; it just needs to be for actual common asset expenditures and not loan liabilities.

Example 2:

Bona Vista Condominiums collects $100,000 in annual Assessment Dues from its membership.

Amount being Allocated to the Reserve Account:                                      $30,000
Roof Replacement Paid from Reserve Account:                                       - $25,000

Total Accepted Allocation:                                                        $30,000      

The above example shows how Lenders will accept the full $30,000 annual amount being allocated to the reserve account. This reflects a 30% allocation rate and is sufficient to meet Lender Approval requirements of 10%. This is an example of an Association utilizing $25,000 allocated to the Reserve Account on actual common area component expenditures (roof replacement) in that same year. The final balance at the end of the year may be the same as if the money was spent to pay back loan payments but Lending Institutions look at them very differently and is one of many reasons to stay well away from loans if at all possible.

An Exception to the 10% Rate
An exception to this 10% rule may be granted if the community has a reserve study completed by a professional independent party which shows less than 10% is adequate for the long term budgeting requirements related to reserve expenditures for a particular community.

Other Reserve Account Requirements
***Additionally some of the below institutions require there to be a balance in the reserve account that is equal to or greater than the expected expenditure costs over the subsequent 5 years for common interest assets.

Below is a links to the pamphlet for FHA approval.

FHA & Reserve Account Requirements - Reserve Study - Professional

**Note that in recent years these requirements are revised almost annually. For full approval there are many other items to consider outside of the Reserve Account including Insurance, Owner Occupancy, Governing Document Verbiage, etc. It is important that an Association consult with their accountants, attorneys and other professionals who can guide them in their respective fields.**


Written by Joel L Tax - Professional Reserve Analyst - 05/10/2016