Page 8 - New England Condominium January 2020

8 NEW ENGLAND CONDOMINIUM
-JANUARY 2020
NEWENGLANDCONDO.COM
BUDGET & FINANCE
Underfunded Reserves
The Dangers of Running Short
BY COOPER SMITH
The importance of saving for a rainy refinancing an underlying permanent
day is a lesson we all learn as children. mortgage or other financing vehicles,”
Just like we as individuals should put he says. Skimpy or depleted reserves can
away a little something for that ‘just-in-
case’ moment, co-op corporations and boiler; they can be a roadblock to a lot of
condominium associations must also other financial necessities.
keep reserve accounts for unexpected
as well as planned replacements and re-
pairs. The question is how much money and how much to keep in reserve, one of
they should keep on hand. The answer to the biggest factors to take into account is
that depends to a great extent on what the the financial profile of the community’s
portrait of the community looks like.
Why Reserves Really Matter
“When people seeking to buy a condo funding reserve increases or replenish-
or co-op see an anemic reserve fund, it ments: the board can levy an assessment;
can have an impact on their decision to build a monthly line item into its com-
purchase [in that building or associa-
tion],” says Jayson Prisand, a partner with the case of a co-op – borrow money, of-
Prisand Mellina Unterlack & Co., LLP, an fering the building as collateral. (Condo
accounting firm in Plainview, New York. associations can also borrow money, but
“If they see that the necessary improve-
ments are being made, that there is mon-
ey to pay for them, they are comfortable.
If the money isn’t there, potential buyers and condo communities are people for
know there may be an assessment. It’s a whom a large assessment would be dif-
red flag. Many people won’t buy into a ficult to manage on short notice. There
situation like that.”
Another major reason to keep capital have sizable assets and prefer to keep
reserves at adequate levels is the possi-
bility of the unexpected. “In a condo or corporation or association. “It’s not com-
co-op,” says Greg Cohen of Impact Real mon, but if unit owner net worth is high
Estate Management, a New York-area enough, they just assess,” says Andrew
property management firm, “there are Freedland, an attorney with Anderson
unexpected situations. New York City is Kill in Manhattan. “Occasionally I see
always changing laws and regulations. it. Usually in small buildings with very
There are new regulations, and items that well-heeled owners who have the ability
require upkeep, and these can be costly. to write a large check if they have to. This
For example, Local Law 11 – or the new represents a very small minority of build-
requirement for elevators to have auto-
matic door monitoring systems, which
have to be installed by the beginning of method of bulking up reserves is to build
2020. If a corporation or association is a line item into residents’ monthly main-
underfunded, the building has no cush-
ion from these new requirements, and this money is collected and placed in the nent mortgages against the entire prop-
these are potentially expensive. You must association’s or corporation’s reserve ac-
also be able to maintain your physical in-
frastructure and do other repairs at the mon practice already in place. Many unit unit is held in fee simple as an individual fy for FNMA approval on the secondary
same time.”
A third reason to keep reserves at ad-
equate levels, particularly in co-ops, is not only a minimum capital reserve, but and depositing the borrowed funds into am representing a purchaser I apprise
their necessity when seeking financing. that monthly charges include a line item the reserves, or by taking a line of credit, them of the risk. One never knows what
Stuart Bruck, a commercial mortgage for replenishment. For example, FNMA along with an underlying mortgage, to might come up. If I am representing an
broker with Time Equities Inc., a real es-
tate firm in New York City, points out that or ‘Fannie Mae’), which purchases these However, Prisand points out that “inad-
adequate reserves are required by banks end loans on the secondary market, re-
and other lenders when refinancing un-
derlying permanent mortgages and/or condition of the loan purchase.
lines of credit. “Banks require replenish-
ment of reserves if they are too low when serves through financing. This method is
not only cost you when it’s time to fix the
What Are the Alternatives?
When considering how to maintain
individual shareholders or unit owners.
Basically, there are three approaches to
mon charges or maintenance fees; or – in
under different collateral arrangements,
which we will return to later.)
The vast majority of residents in co-op
are properties, though, where residents
their money working for them, not the
ings.”
A more common – and less painful –
tenance or common charges. Each month co-op properties carry underlying perma-
counts. In many buildings, this is a com-
end-loan lenders for co-op and condo unit of real estate). For co-ops, reserve ac-
purchases require that buildings have counts can be replenished by borrowing of unit owners to obtain mortgages. If I
(Federal National Mortgage Association be tapped when major work is required. association, I advise them to build up the
quires a 10 percent reserve line item as a interest rates, escrows or reserve require-
The third alternative is to replenish re-
more applicable to co-ops than condos, as unit-owner ability to finance as well. El-
erty (Condominiums cannot place a lien in both Massachusetts and Rhode Island
against the entire property because each says, “Owners may not be able to quali-
equate reserves can also lead to higher is never a reason for inadequate reserves.”
ments.”
Options for Condos
Low reserves can affect buyer and
len Shapiro, a partner with Goodman
Shapiro and Lombardi, a law firm located
market. Low reserves affect the ability
reserves if they are not sufficient. There
In the past few years however, some
banks and other lending institutions have
begun to look at financing of condomini-
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