Don’t Believe Everything You Read: A Glitch in the Replacement Reserve Statute May Lead Some Associations Astray
By Matthew A. Drewes, Esq.; Thomsen Nybeck, Attorneys at Law
By now most readers probably are aware that, as of January 1, 2012, there are new requirements regarding replacement reserves for associations governed by the Minnesota Common Interest Ownership Act ("MCIOA”).* These requirements are set out at Minn. Stat. § 515B.3-1141 (prior fiscal years were covered by 515B.3-114), and most are easy to understand. For example, the board of directors must, in the future, not only evaluate reserves based on the useful life of each component the association is required to replace, but must review the association’s compliance every three years. The association must also keep reserve funds in a separate account from operating funds, and may not borrow from reserves to pay operating expenses.
There are some exceptions to the reserve requirements, however, and many associations may mistakenly believe that one in particular applies to them. This exception provides that associations do not have to set aside reserves for all of the components they’re required to replace, as long as they follow a certain procedure to authorize payment for that work through a special assessment according to Minn. Stat. § 515B.3-1151(c). But most associations existing today cannot make use of the special assessment procedure provided under Section 3-1151 because they are still controlled by the old version of the statute, Minn. Stat. § 515B.3-115.
Even though Section 3-1141 applies to all associations governed by MCIOA for their fiscal years commencing after the New Year, the exception allowing reserve requirements to be covered by special assessments relies on Section 3-1151(c). That section only applies to associations created on or after August 1, 2010. The old version (Section 3-115) does not authorize special assessments. Therefore, associations existing before August 2010 are not permitted to rely on Section 3-1151 and cannot plan to use a future special assessment to cover an intentional shortfall in reserves. It will likely be developers who make the most use of this option, because they can plan for the replacement of certain components to be covered by special assessments while keeping monthly assessments low as they sell off their inventory of units.
Those associations that are not alerted to this glitch are at risk of making a decision that jeopardizes their financial future, while violating their obligations under the new reserve statute in the process. Hopefully, this article will help associations avoid this serious mistake.
* NOTE: The statutes discussed in this article do not apply to all community associations. To find out whether your association is governed by MCIOA, contact a community association attorney. The information in this article is provided solely as general information, and not as legal advice. Your receipt, and even your use of this information, does not establish an attorney-client relationship. Readers are urged to speak with a qualified attorney focusing on community association law when making decisions regarding a specific legal issue, including whether these laws apply to a particular community.