Reserve fund

A reserve fund is a financial reserve established as part of property management to cover future major maintenance and renovation projects. In condominium ownership, it is required by law under the term “maintenance reserve” (Section 19 of the German Condominium Act [WEG]); for privately rented single-family homes, it makes good business sense but is not required by law. The purpose of the reserve fund is to finance major expenses (roof replacement, facade renovation, heating system replacement) using accumulated capital, rather than imposing special assessments when needed or taking on expensive short-term debt.

Maintenance Reserve in the WEG: Amount and Administration

In condominium associations, the creation of an adequate maintenance reserve is mandatory. “Appropriate” is not defined by law, but the Second Calculation Ordinance (§ 28 II. BV) provides annual figures as a guideline depending on the building’s age: For buildings up to 22 years old, €7.10 per square meter of living space; for buildings between 22 and 32 years old, €9.00 per square meter; and for older buildings, €11.50 per square meter annually. In practice, these guidelines are often considered a minimum; for older buildings, €15-20 per square meter per year is recommended.

Peters’ formula offers another guideline: According to this, approximately 1.0-1.5% of the building’s original construction costs should be set aside annually. For a building with construction costs of €800,000, this amounts to €8,000-12,000 annually, or €500-2,000 per unit depending on the size of the apartment.

The reserve fund is held in a joint account and is earmarked for a specific purpose; it may only be used for maintenance measures on the common property. The owners’ meeting decides on its use by resolution. For extensive measures-such as facade renovation or elevator installation-a financial plan with detailed cost estimates is typically prepared, and the resolution is based on this plan.

Reserve Funds for Individual Properties and Private Landlords

Private landlords who own a multi-family home or a single rental apartment should also establish a reserve fund. As a guideline, set aside 1-1.5% of the building’s asset value annually. For a building valued at €500,000 (building share), this amounts to €5,000-7,500 per year. This reserve is not immediately tax-deductible as business expenses; maintenance expenses are only deductible in the year they are incurred. The reserve fund is therefore a purely business-related precautionary measure that prevents liquidity shortages in the event of unforeseen repairs.

Those who plan their reserve fund carefully can carry out repairs gradually instead of paying for expensive emergency repairs. A leaky roof that has been neglected for years often causes consequential damage to the building and tenants’ furnishings, resulting in costs two to three times the original repair expenses. Regularly building up reserves therefore not only protects the owner’s liquidity but also preserves the building’s value in the long term.

Investment and Protection of the Reserve Fund

Under the Condominium Act (WEG), the maintenance reserve must be held in a separate joint account and protected against the insolvency of the property management company. Modern WEG managers use fiduciary accounts with restricted access rights for this purpose. The investment should be made in risk-free instruments (money market accounts, time deposits, federal securities), as the funds are earmarked for a specific purpose and the risk of loss must be eliminated.

For private landlords, a separate savings account or time deposit account is recommended, which is used exclusively for maintenance purposes and is included in the property’s liquidity plan. In an environment with positive interest rates, the reserve account generates a certain return that at least partially offsets the real loss of value due to inflation. It is important that the reserve is not used for other purposes-vacations, consumer spending, other investments-as this would undermine the security of liquidity.

Reserve Funds and Buying a Condominium: What Buyers Need to Check

When purchasing a condominium, the reserve fund balance is an important indicator of quality. A well-funded reserve fund signals that the condominium association manages its finances with foresight and can finance major projects without having to approve special assessments. An underfunded reserve fund, on the other hand, is a warning sign: it increases the risk of special assessments after the purchase and strains the new owner’s liquidity.

We recommend that buyers request and review the following documents before finalizing the purchase: the most recent WEG annual financial statement showing the current reserve fund balance, the current fiscal year’s budget, the minutes of the last three owners’ meetings, and any existing resolutions regarding planned measures or special assessments that have already been approved. These documents reveal whether major projects have been approved but not yet financed-which effectively constitutes a hidden increase in the purchase price.

Practical Tip for Owners in Nuremberg and Franconia

In many Nuremberg condominium associations (WEGs) from the 1960s-1980s, maintenance reserves are dramatically underfunded-when taking over apartments, we regularly see reserve balances that amount to less than one year’s contribution of the recommended minimum allocation. This is particularly problematic because major renovation measures are now pending in these buildings: retrofitting elevators, facade insulation in accordance with GEG standards, and heating system modernization to heat pumps or district heating. The costs of such measures for a medium-sized apartment building can easily reach €150,000-€400,000, which, for 10 units, translates to special assessments of €15,000-€40,000 per apartment.

Buyers of condominiums in Nuremberg and the metropolitan region should therefore: calculate the reserve fund balance per square meter (reserve fund divided by the total living area of the condominium association), check whether known measures have already been approved, and adjust the property value accordingly. If the reserve fund is significantly underfunded, a purchase price discount equal to the expected special assessment can be negotiated. We are happy to assist you with an assessment based on the HOA documents.

Frequently Asked Questions

Can the maintenance reserve be transferred to the buyer when purchasing an apartment?

Yes. The maintenance reserve is part of the condominium association’s common property and is automatically transferred to the buyer upon purchase of the unit-however, the buyer is not entitled to a separate share of the reserve fund, as the reserve is held in common. The purchase price for a condominium unit typically includes the buyer’s share of the maintenance reserve; this effectively increases the purchase price. The purchase agreement can explicitly stipulate whether the purchase price includes the reserve fund or not.

What happens if the reserve fund is insufficient for a necessary renovation?

If the reserve fund is insufficient for approved measures, the condominium association must approve a special assessment. This entails a one-time additional payment for all owners, distributed according to their co-ownership shares. Alternatively, the homeowners’ association can take out a loan; since the 2020 homeowners’ association reform, this has been possible with a majority vote. Special assessments can be substantial-for facade insulation on an old building in Nuremberg, €5,000-20,000 per residential unit is not uncommon.

Are contributions to the maintenance reserve tax-deductible?

Ongoing payments into the maintenance reserve are not immediately tax-deductible for landlords. Maintenance expenses are only deductible once the HOA carries out specific measures and uses the reserve for that purpose. In the year of expenditure, landlords can claim their share of maintenance expenses as income-related expenses. Owner-occupiers can deduct 20% of the labor costs (up to €1,200 per year) for contractor services under Section 35a of the German Income Tax Act (EStG).

What should be the minimum amount of a homeowners’ association’s maintenance reserve?

As a minimum, we recommend that the reserve be sufficient to cover a significant portion of the costs of at least one major project-such as roof replacement or heating system replacement. For a typical Nuremberg apartment building with 10 units built in the 1970s, the reserve should amount to at least €50,000-€80,000 to remain operational. If the balance is below this, an increase in the maintenance fee or an extraordinary allocation is strongly recommended. A long-term maintenance plan that lists all foreseeable measures for the next 10-15 years is the best foundation for needs-based reserve fund planning.

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