Funding Your Reserves Banking Against Surprises

Hector and Hedy Johnson bought a new condominium in Queens in 1995 and lived there for 19 years. In 2014 they sold the apartment to Leonard and Lena Smith. A year later, the condominium association’s board of directors voted to replace the building’s roof and imposed a special assessment to pay for the project. “That’s not fair,” the Smiths complained, insisting that they shouldn’t have to pay the full assessment to replace a roof that sheltered the Johnsons for 95 percent of its life. 

It wasn’t fair—but major components and systems don’t last forever, and big assessments are what happens when a board doesn’t set aside funds on a regular basis to update those components and systems. 

“The number one mistake a board can make is characterizing such things as future expenses,” says Robert Nordlund, founder and CEO of Association Reserves, Inc., a Calabasas, California-based, reserve study firm with clients in every state. 

“It’s human nature to worry about future things at a future time,” he explains, “but if you characterize reserve expenses as offsetting ongoing deterioration, the future takes care of itself. Associations that don’t pay this ongoing bill doom themselves to deferred maintenance, special assessments, and declining property values.”

What Deserves Reserves

Nordlund says that for an item to warrant reserve funding, it must be a common area maintenance responsibility, exceed a minimum threshold cost, and have a limited and predictable useful life.

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Comments

  • As president if a NYC coop I have been abke through due diligence to maintain a well funded reserve. However NYC constantly changes laws such as LL11 , LL87 and others still to come that even when you feel you have enough funds you're wrong. The city seems to feel that coop owners have unlimited monies available and don't understand the demographics. Older owners just can't come up with assessments. As I said we have been fortunate so far. But with NYC you never know.