N.J. Admin. Code § 5:26-8.7

Current through Register Vol. 56, No. 19, October 7, 2024

Section 5:26-8.7 - Budgets for developer-controlled boards

(a) During developer control of the association's governing board, the association shall, prior to making an annual assessment, prepare and adopt an operating budget, which shall provide, for any and all common expenses to be incurred during the fiscal year, as well as adequate reserve funds for repair and replacement of the common elements and facilities.

1. Replacement of the common elements may include repair or replacement of a component of a mechanical system or facility necessary for the proper maintenance or operation of such system or facility.

2. "Adequate reserve funds" are those monies specifically dedicated for repair or replacement of common elements and facilities that have reached the end of the established useful life, based on the most recent reserve study, of each common element or facility, or one or more components of that element or facility, without the need for special assessments or loans. Contributions shall be established for common elements and facilities with useful lives, or remaining years of use, up to and including 30 years, and for roofs regardless of their useful lives.

3. The amount to be maintained in the reserve funds account shall be determined by an independent licensed engineer or architect as part of the reserve study.

4. During developer control of the association's governing board the following requirements shall apply:

i. Reserve funds shall be maintained in a segregated account in the name of the association and not comingled with other common expenses or capital contribution accounts.

ii. The account shall be located in a bank that is FDIC-insured and authorized to do business in the State of New Jersey.

iii. Following the election of the first unit owner to the board, and continuing until control of the association governing body is transferred to the unit owners, withdrawals from the reserve funds account shall require one signatory from the developer and one signatory from the owner-elected board members.

5. Reserve funds shall only be used for repair and replacement costs for which they are collected. A developer-controlled association board may not utilize reserve funds to repair or replace any common element unless:

i. The item that is sought to be repaired or replaced was included in the reserve study;

ii. The common element component to be repaired or replaced has exhausted not less than 90 percent of the useful life specified in the reserve study. In the event the common element component to be repaired or replaced has not exhausted 90 percent or more of its expected life, then a majority vote of a quorum of unit owners, other than the developer, as defined by the association governing documents, is required to utilize the reserve funds dedicated and maintained for the specific common element component's repair or replacement; and

iii. The reserve account has been fully funded in accordance with the association budget.

(b) A new reserve study shall be prepared in the following situations:

1. When a developer submits an application for an expandable project for registration in accordance with N.J.A.C. 5:26-2.4. Each addition shall require an update to the reserve study to account for all new common elements and facilities to be constructed in each expansion phase and all common elements and facilities constructed in prior phases where repair and replacement costs were not previously accounted for in the most current reserve study.

i. The developer shall bear the expense of the reserve study for common elements in any new phase; and

ii. The association shall bear the expense of any new common element added to a phase that is built out and sold out at the time of submission of the application to add a new phase.

2. Where the common elements and facilities differ from the common elements and facilities shown on the building plans or described in the public offering statement, a new reserve study shall be conducted. The public offering statement shall be amended, filed, and registered in accordance with N.J.A.C. 5:26-4.5 to reflect the updated as-built common elements and facilities.

3. Based on the findings set forth in the most recent reserve study, the repair or replacement cost of those items classified as common elements and facilities in the governing documents shall be a good faith estimate of the cost to the association to repair or replace each item identified in the reserve study including demolition, removal, and other costs related to the repair or replacement of these items in current dollars.

4. The reserve study shall be accompanied by a letter of adequacy prepared by an independent licensed architect or engineer.

5. While the developer maintains control of the association board, the cost of any reserve study shall be the responsibility of the developer and shall not be classified as a common expense.

(c) Any deficit in the operating fund occurring during the budget year caused by unforeseen or unanticipated expenses shall be accounted for either by a determination by the association board that such unforeseen, unanticipated expenses do not materially affect the ability of the association to meet its current or ongoing financial obligations, or a determination by the association board that such expenses render the association unable to meet the association's current or ongoing financial obligations, in which case the association board shall modify the budget.

1. When the annual budget to be used is the full occupancy budget, then when modified, it shall be amended pursuant to N.J.A.C. 5:26-4.5, prior to its use as the annual budget.

i. When the annual budget being used is other than the full occupancy budget, it shall be amended accordingly, and a copy of the revised budget shall be provided to the unit owners and the developer no later than 30 days prior to the start of the next budget year.

ii. When the developer is in control of the association board and still selling units in the ordinary course of business, the amended budget shall also be filed with the Agency as an amendment to the registration within 30 days of adoption of the budget.

2. In the event the annual audit of the association determines a different deficit than originally calculated, the following shall govern:

i. When the association's final audit reveals that the deficit for the preceding budget year was greater than the amount previously calculated as of the year end, the developer shall pay to satisfy the additional deficit within 30 days following adoption of the final audit, except that portion attributable to unit owners' delinquency or unforeseen, unanticipated circumstances as set forth in the governing documents.

ii. When the deficit is less than the amount previously calculated, the association shall reimburse the developer the difference between the amount paid by the developer and the actual deficit amount.

(d) At least 60 days prior to the first day of the next budget year, the developer shall provide the unit-owner-controlled board with a written statement of the anticipated number of units to be closed during the next budget year and shall identify any new common element or facility anticipated to be placed in use during the next budget year.

(e) When the developer maintains a majority of the association board, the budget shall be prepared in accordance with this subsection.

1. In addition to the full occupancy budget required pursuant to N.J.A.C. 5:26-4.2(a)8, the developer shall prepare, or cause to be prepared, for each budget year an annual budget including all anticipated association operations, deferred maintenance, and replacement reserves. The annual budget shall be based upon the number of units anticipated to be under construction during the budget year, including units previously closed and units registered with the Agency, but not conveyed to a purchaser; and the reasonable expenses, taking into account the number of units anticipated to be under construction for the budget year and any common elements or facilities that were put into use during a prior budget year. All budgets prepared by the developer while it is in control of the board shall include an expense line item equal to three percent of common expenses to account for assessments unpaid by unit owners.

2. No budget prepared by the developer, or by the association board while under the control of the developer, shall contain any payment or subsidy by the developer that minimizes the monthly assessment, unless the details are fully disclosed in the public offering statement as a special notice to the satisfaction of the Agency.

(f) While the developer maintains control of the executive board, the executive board shall have an annual audit of association funds prepared by an independent public accountant, a copy of which shall be delivered to each unit owner within 90 days of the expiration of the fiscal year of the association. The audit shall cover the operating budget, capital reserve, and other reserve fund accounts.

(g) Until the expiration of any management contracts entered into while the developer maintains control of the executive board, the developer shall ensure that a bond, or other guarantee acceptable to the Agency, is posted.

1. For the first year of operation, the bond or other guarantee shall be in an amount equal to the annual budget. For the second year and for succeeding years, the bond or other guarantee shall be in an amount equal to the annual budget plus accumulated capital reserve and other reserve funds.

2. While the developer maintains control of the association board, the developer shall provide the agency with proof of such bond or other guarantee as may be necessary at the time of registration and annually thereafter.

N.J. Admin. Code § 5:26-8.7

Amended by R.1983 d.576, effective 12/19/1983.
See: 15 New Jersey Register 1408(a), 15 New Jersey Register 2154(a).
Added (c) and (d).

Amended by 53 N.J.R. 1213(a), effective 7/19/2021