As community members, co-op and condo owners work together to maintain the greater structure in which they live – not just their individual units. Major systems – things like boilers, roofs, and facades – are expensive to maintain and repair, but each has a standard useful life. Thus, boards and managers should be diligent to keep track not only of the condition of those systems, but of the capital funds available to repair or replace them, need be. Co-ops and condos should also have a second type of reserve fund, for unexpected operating expenses. This reserve is usually smaller than the main capital fund, and is in place to protect the corporation’s or association’s ability to pay bills or meet at least initial payments on emergency situations.
There isn’t any legal requirement for a minimum reserve fund amount per unit per se. However, most attorneys, accountants, and lenders who make loans to co-ops and condos recommend that corporations and associations follow Federal National Mortgage Association (FNMA, also known as ‘Fannie Mae’) guidelines, which require a 10 percent reserve as a line item in their annual budget.
For the purposes of real estate, the concept of ‘useful life’ is defined as the number of years an asset will likely remain in service for the purpose of cost-effective revenue generation. In the context of co-op and condo properties, the concept can be applied to pretty much any and all individual building systems, like elevators, plumbing lines, facades, and boilers. Remaining useful life can be determined for each individual system as well. Simply put, if a boiler has a typical useful life of 50 years, and your building’s boiler is 30 years old, one might assume that the boiler has a remaining useful life of about 20 years.
That’s in a perfect world, of course. In the real world, that boiler – if well cared for – may have a remaining useful life of more than 20 years. Alternatively, if the boiler has not been well maintained, or has some defect or atypical physical problem, it may have already reached its useful life and be one cold snap away from going on the fritz.
All that said, the end of useful life does not necessarily mean that a particular system needs to be torn out and completely replaced. Imagine not only the cost, but the perhaps impossible logistics of taking down and rebuilding an entire façade! Instead, when systems near the end of their estimated useful life, they can often be rebuilt, repaired or renewed. Upgrading or refurbishing an elevator – while by no means cheap – is far less expensive than replacing it with a brand-new one.