All Cooperatives, Condominiums and Homeowners Associations need to be concerned about their eligibility for Fannie Mae loans to avoid conflicts between the Board and Unit Owners who are attempting to sell their units. This is due to the fact substantially all end loans on individual units are originated through Fannie Mae. The Board is most likely to be informed about a difficulty encountered in satisfying approval requirements by the current unit owner, as they believe the hard part of selling is behind them, i.e., finding a buyer.
However, the buyer generally can not obtain a mortgage if the property does not meet the eligibility requirements.
The most pressing issue which is impacting both established and new Condominium projects is that the budget is to provide for funding of replacement reserves for capital expenditures and deferred maintenance of at least 10% of the budget. We all need to remember that this should not be viewed as a threshold that replacement reserves are to be in excess of 10% of the budget, but rather that the annual funding of such is 10% of the budget. For many properties, this is has potentially required an increase in carrying charges of 10% above rising operating costs.
For example, an unusually cold winter can make the full funding of this provision a potentially difficult situation. Many properties can come close to depletion of their FULL YEAR heating budget just partway through the winter. This means the shortfall has to come from another source. If all is going well elsewhere in the budget, some will find overall that their properties are still on target. If not, an additional assessment, even though fully explainable, is generally frowned upon. That leaves utilizing existing cash or the annual reserve fund provision. We suggest Board fully explore the effects on potential cost overruns, especially in energy costs. The most comprehensive method is to have a consumption to date report obtained from the vendor and compare the amounts to your annual budgets. Historically, 2/3 of the heating budget is utilized in the first six months of the calendar year.
Czarnowski & Beer LLP has always recommended that a long term funding vehicle be in place for all of our clients. While waivers are being issued in certain situations, established and new Condominium projects should endeavor to establish a reserve provision of some amount in their operating budgets and work toward fully satisfying the requirement over a certain period.