Saving for a rainy day is a lesson we all learn as children. As individuals, we put away a little something for that ‘just-in-case’ moment; similarly, co-op corporations and condominium associations must keep reserve accounts, not just for unexpected replacements and repairs, but for expected ones as well.
The question is, how much money your board of trustees should keep on hand? The answer may depend to a great extent on what the ‘portrait’ of your community looks like.
Why are Adequate Reserves Important?
“When people seeking to buy a condo or co-op see an anemic reserve fund, it can have an impact on their decision,” says Jason Prisand, a partner with Prisand Melina Unterlack & Co, an accounting firm located in Plainview, New York. “If they see that necessary improvements are being made, and that there is money to pay for them, they’re more comfortable. If the money isn’t there, potential buyers know there may be an assessment – and that’s a red flag. Many people won’t buy into a situation like that.” (For more on the importance of your community’s financial profile, see also our article on raising monthly fees, elsewhere in this edition of New England Condo. -Ed.)
Another major reason to keep capital reserve levels healthy is the ever-present possibility of the unexpected. Greg Cohen is the president of Impact Management, a co-op and condo management firm with offices in Manhattan, Westchester and Long Island, New York. “In a condo or co-op,” he says, “there are unexpected situations. There are new city and state regulations, and items that require upkeep, and these can be costly. If a corporation or association is underfunded, the building has no cushion from these new requirements, and these are potentially expensive. You must also be able to maintain your physical infrastructure and do other repairs at the same time.”
What Are the Alternatives?
When considering how much your community should hold in its reserves, and how to raise and maintain those funds, the financial profile of the individual shareholders or unit owners is a primary consideration. This is because basically, there are three approaches to funding or replenishing reserves: The board of trustees can levy an assessment, build a monthly line item into the common charges or maintenance fees, or – in the case of a co-op – borrow money, offering the building itself as collateral. (It should be noted that condo associations can borrow money too, but under different collateral arrangements, which we will return to later.)