What your reserve study's funding method means after August 3.

Two provisions of Fannie Mae Lender Letter LL-2026-03 take effect August 3, 2026. The first has been widely reported: the end of limited review for established condominiums. Every loan on an NYC condo with more than ten units now requires full underwriting. The second provision has had less coverage. Starting August 3, a baseline-funded reserve study is no longer a safe harbor when a lender reviews reserves. Under the new rule, a baseline study is evidence that the building is funding below the study's own highest recommendation — and that finding does not help a loan close. Companion to Every NYC condo loan goes to full review on August 3 and Fannie Mae's 15% reserve floor arrives in January.

What the reserve study provision in LL-2026-03 actually says.

Lender Letter LL-2026-03 contains two separate reserve provisions. The first sets a floor: condo associations must allocate at least 10% of annual assessment income to reserves, rising to 15% for loan applications dated on or after January 4, 2027. The second provision, effective August 3, governs what happens when a lender uses a reserve study as an alternative path to confirming reserve adequacy rather than applying the floor test directly.

The rule reads, in substance: if the lender relies on a reserve study to demonstrate that a project has adequate reserves, the association's operating budget must allocate at least the highest recommended reserve funding amount identified in that study. There is no middle ground. If the study contains a baseline scenario and a full-funding scenario, the budget must meet the full-funding figure. The baseline scenario cannot satisfy the requirement, even if the board is budgeting exactly what the baseline scenario recommends.

The three funding scenarios and how they differ.

Reserve engineers typically prepare studies with three or four funding scenarios, each projecting the same reserve liabilities forward over 20 to 30 years with different assumptions about annual contributions.

The baseline scenario keeps the reserve balance at or above zero throughout the study period, with no required floor. Contributions are minimized, and the balance may approach near-zero between major expenditures. This scenario produces the lowest recommended annual contribution of any method.

The threshold scenario maintains a minimum balance floor — either a fixed dollar amount or a percentage of unfunded liabilities. Contributions are moderate, higher than baseline but below full funding.

The full-funding scenario targets a balance equal to 100% of what it would cost to replace every reserve component at the end of its useful life, weighted by how worn each component currently is. Contributions are highest.

Before August 3, all three scenarios could appear in the underwriting package and satisfy a Fannie Mae reserve review. Starting August 3, only the highest of the three available scenarios satisfies the study-based test.

Why NYC boards disproportionately chose the baseline method.

New York has no statute requiring condo associations to commission reserve studies, or specifying which funding method to use if they do. The bills that would have changed that, Assembly Bill A8945 and Senate Bill S7600, were referred to committee in 2025 and did not advance before the legislature adjourned in June 2026.

Without a state standard, reserve studies in NYC were commissioned voluntarily. Boards typically commissioned them because a lender asked, or because a sale fell through without one. When the study is voluntary and the board chooses the funding scenario, the board's interest points in one direction: the scenario that produces the lowest recommended annual contribution, because a lower contribution means lower common charges, which makes the building more attractive to buyers.

There was no legal floor. A board could adopt the baseline scenario's recommendation, call it adequate, and the building's managing agent would execute that budget without any state agency reviewing the methodology. The result is a pool of NYC condo buildings with voluntarily commissioned reserve studies that used the baseline method — studies that now identify a funding shortfall rather than confirming adequacy when a Fannie Mae full review examines them.

The jurisdictions that avoided this problem did so because they set the standard before the incentive to choose the less expensive method took hold. New Jersey's 2024 mandate requires reserve studies and specifies that the plan must keep the reserve balance above a defined floor. Hawaii has required annual audits and triennial reserve studies since 2006. New York did neither, and so the methodology choice fell to individual boards with no guidance from state law.

The 36-month age limit adds a second exposure.

LL-2026-03 also requires that any reserve study the lender relies on must have been completed within the prior 36 months by an independent qualified professional. A study or update dated before July 2023 does not qualify regardless of which funding method it used.

Buildings that commissioned studies for 2021, 2022, or 2023 financing events and have not had the study updated since face two problems simultaneously: the study may be too old and, if it used the baseline method, ineligible on methodology. For those buildings, a new study or a formal update is needed in any case. A reserve study "update" uses the original component inventory and refreshes the cost projections, condition assessments, and funding scenarios. It is less expensive than a new study and often available in two to four weeks.

How to check your building's reserve study in three steps.

Boards and managing agents can complete this review with a copy of the most recent reserve study document.

• Step 1 — Confirm the date. Open the study's cover page or executive summary and find the date the study or most recent update was prepared. If the date is before July 2023, the study does not qualify. Start the update process now.
• Step 2 — Identify the funding scenario. Find the section labeled "funding scenarios," "reserve fund analysis," or "executive summary." Identify which scenario the study recommends and which one the board adopted. If the language includes "baseline," "minimum funding," "cash flow," or "no-negative-balance," the baseline method was used. If the study shows only one scenario without labeling it, ask the engineer which method was applied before assuming it qualifies.
• Step 3 — Compare the highest recommended allocation to the current budget. Find the annual contribution recommended under the study's highest scenario. Then look at the reserve line in the board's current adopted budget. If the budget is less than the study's highest recommendation, the study does not satisfy LL-2026-03, and the building must meet the percentage floor instead.

What to do if the study fails the check.

Three options are available, in order of how quickly each can be completed:

Waiting until after August 3 to start an update is not an option for unit owners who need to close a sale between August 3 and January 4, 2027. A full-review underwriter who sees a baseline-funded or expired study and cannot confirm the building meets the percentage floor will not clear the loan. A new study takes four to eight weeks from engagement. That timeline cannot compress to meet a closing date that is already set.

New York State has no mechanism that compels boards to take any of these steps. The AG's Real Estate Finance Bureau does not have authority over how boards manage reserves in operating condominiums, as distinct from offering plan representations. There is no HPD enforcement mechanism for reserve underfunding in condos. The only actor that enforces the reserve standard is the mortgage market: a lender who cannot confirm adequate reserves does not close the loan, and a buyer who cannot get a conventional mortgage does not close the sale.

Bottom line.

The end of limited review is the August 3 change most boards focused on. The reserve study funding method requirement is the one that determines whether buildings that voluntarily commissioned studies under the baseline method are better or worse positioned than buildings that never commissioned one. In both cases, the outcome turns on whether the current budget hits the 10% floor or can be demonstrated under a qualifying study. Boards have 13 days to run the three-step check above. A new reserve study cannot be commissioned on August 3 and ready in time to save a closing that week. The window to act is now.

Primary sources: Fannie Mae Lender Letter LL-2026-03 · NY Assembly Bill A8945 (reserve study mandate, not enacted) · NY Senate Bill S7600 (reserve study mandate, not enacted)

Companion resources: Every NYC condo loan goes to full review on August 3 · Fannie Mae's 15% reserve floor arrives in January · New Jersey mandated reserve studies for condos · Hawaii required condo audits in 2006 · All 100+ regulatory gaps · How we measure reserve scores · Forensic building reports