I live in a newer association that recently performed a reserve study. We learned that many of our components have a 50 year expected useful life. State law only requires that we reserve for components that have a useful life of 30 years or less. How do we properly reserve for these components?

Starting with fiscal years commencing in 2012, Minn. Stat. §515B.3-1141 controls the replacement reserve requirements for MCIOA associations.  The statute requires that associations include in their budgets contributions to a reserve account to fund the replacement of “those components which the association is obligated to replace by reason of ordinary wear and tear or obsolescence.”  Minn. Stat. §515B.3-1141(a).  Subsection (a)(1) provides that the association must consider the estimated remaining useful life of the component and states that the reserves do not have to be segregated for a specific component.  This means that a single reserve account can be created where the reserve funds for all items can be commingled.  In addition, the board must take into effect how much useful life remains on each component when setting the reserve contribution amount for the annual budget.

As stated in the question, the law only requires that components with a remaining useful life of 30 years or less be reserved for.  If you have a component that is required to be replaced by the association and has a useful life over 30 years no reserve is required.  However, as the years progress the useful life will eventually fall to within the 30 year window.  At that time, the association must begin to reserve for the replacement of the component.  Please note, the 30 year requirement is the minimum required by the statute.  Although not common, the declaration may require that a longer useful life be used, or the board may decide to reserve even though it is not required to do so by the statute.

One final note;  MCIOA was changed recently to require that reserves be kept in a separate bank account from the operating funds, and borrowing from the reserves to cover a shortfall in the operating fund isn’t allowed.

A version of this article first appeared in the "Ask the Attorney" column (written by Nigel Mendez) in the Minnesota Community Living magazine published by CAI-MN.