Don’t Raid the Cookie Jar Capital Budgeting is Essential

Sometimes the future seems like it’s an awfully long way away. If a roof is going to last 30 years, why should we worry about it today? Same with that shiny new boiler or that flat, crack-free pavement just poured two summers ago. Eventually, though, everything new grows old. Wear and tear sets in and soon, those elements we thought would last forever are in need of repair or replacement.

That is where a reserve study comes in handy—very handy, in fact, because it means the condo or co-op community has been socking away savings for years in order to pay for those replacements and repairs. Unfortunately, regular deposits to the “future needs” cookie jar have not always been a popular idea among owners, says reserve study specialist Mitch Frumkin, PE, RS, CGP, president and founder of Kipcon, a full-service engineering firm headquartered in North Brunswick, New Jersey, with offices in New England and around the country.

Change Begets Change

That attitude changed, though, as the number of mortgages backed by Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA) began to grow. “Today,” he says, “75 percent of condo mortgages are guaranteed by FHA, Fannie Mae and Freddie Mac.”

This shift has tilted the scale in favor of reserve studies because “they have regulations for insuring mortgages and in order for it to be guaranteed, there are certain requirements that have to be met,” Frumkin says. One of those requirements is that 10 percent of the budget must be set aside on an annual basis for future repairs, or the board must do a reserve study that shows they can afford to put aside less.

“In a high rise, you can have a $7 million budget, and ten percent of that is $700,000” so that is what must be set aside each year, says Frumkin. If a reserve study is done, though, analyzing exactly what replacements and repairs must be made in the years to come and how much needs to be saved to pay for them, the number will likely be significantly less. “You can pay $15,000 for a reserve study and spend hundreds of thousands of dollars less,” Frumkin says.


Related Articles

Tapping Reserves in a Time of Financial Crisis

An Option to (Carefully!) Consider

Façade Inspections

A Critical Component of Your Maintenance Plan

Inadequate Reserves

The Risks of Not Keeping Up