A Reminder on Reserves (and Insurance)

Legal Alert

September 24, 2026

You may recall from our Legal Alert dated April 9, 2026, that Fannie Mae and Freddie Mac have promulgated new requirements on individual coop/condo apartment lenders pertaining to building capital repair/replacement reserve requirements and to building and individual apartment owner property damage insurance. The requirements specifically apply to condominiums, but will likely also be applied to cooperatives, and may, as a practical matter due to lender business practices and policies, apply to buildings even where few of the individual shareholders or purchase applicants use Fannie Mae conforming loans.

This is a reminder of the significant requirements that became effective July 1, 2026, August 3, 2026, and that will become effective January 4, 2027.

Building Capital Expense and Deferred Maintenance Reserves

For lenders to make Fannie Mae qualified loans on apartments in a building, the building must have financial reserves for use in capital expenditure and deferred maintenance costs. The lender must confirm that the building either (i) sets aside annually 15% of its maintenance/common charge income into a reserve account, or (ii) sets aside an annual amount specified as needed in an engineering “Reserve Study” that assesses the condition and anticipated future expenses for the structure of the building for which the Board is responsible and that has been completed within the prior three years.

As of August 3, 2026, a building’s reliance on option “ii” above, based on a Reserve Study, is acceptable only if the building is setting aside, annually, the “highest recommended reserve allocation” in the Reserve Study. Before relying on this Reserve Study option, a Board and management may wish to consider whether a Reserve Study is needed or desired, taking into account the cost of the Reserve Study, the nature of the building (new/old, well-maintained/deferral of maintenance/repairs), and the Reserve Study’s difficulty of accurately evaluating the likely elements of the building needing replacement/repair and the likely future timing and cost thereof. The Reserve Study annual budget set-aside may be greater or less than the 15% requirement of option “i” above.

As of January 4, 2027, i.e. when the 2027 budget calculations become effective, unless the building has a current Reserve Study upon which it intends to rely, the building’s annual budget must include the 15% of income annual set-aside into a reserve account for the budget to be used by lenders as the basis for meeting the Fannie Mae apartment loan requirements. “Income” includes, generally, only budgeted apartment owner payments (common charges, maintenance, budgeted assessments), not income from other sources such as rental income, investment income, utility reimbursements.

As of August 3, 2026, the prior “limited review” of the building condition and finances is no longer allowed. Unless the building has “pre-qualified”, a more detailed “full review” (of building reserves, delinquency rate, insurance, litigation, and special assessments) must be conducted by the lender for each individual apartment loan application.

Boards and their managers should include these reserves requirements in their 2027 budgeting process.

Insurance

One element of the “full review” is the building insurance.

For loan applications made on or after July 1, 2026, the lender must confirm that the building has “full replacement cost” property damage insurance (except for roofs) for the value of all building elements for which the Board has repair/replacement responsibility. The allocation of responsibility for repairs/replacements typically differs between condominiums and cooperatives, and the Fannie Mae insurance requirements may thus also differ in their application to a cooperative building or a condominium building. In a condominium, the bylaws typically allocate more responsibility for repair/replacement of individual apartment elements to the apartment owner.

Insurance deductibles in building policies must be no greater than $50,000 per apartment.

If the building policy does not include unit interiors or improvements within units, or includes per-apartment deductibles, each apartment owner must have a replacement cost property damage policy sufficient to cover the apartment owner’s repair/replacement responsibility with an individual deductible of not more than the greater of $2,500 or 5% of the insurance coverage amount.

Boards and their managers should undertake a review of building property damage policies and of governing document requirements related to apartment owner insurance.

You may contact any member of Smith, Gambrell & Russell’s cooperative and condominium practice group with questions or for assistance.