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 need to be repaired and replaced. 

How much should your community have socked away? That is where a reserve study, or sometimes what’s called a capital needs assessment in New York City, comes in handy—very handy, in fact, because it means the co-op or condo community has been setting aside savings for years in order to pay for those replacements and repairs. 

While reserve studies are more common in other parts of the tri-state area, they were not always popular in Manhattan, says leading reserve study specialist Mitch Frumkin, PE, RS, CGP, president and founder of Kipcon, a full-service engineering firm headquartered in North Brunswick, New Jersey. “In Manhattan, people were forever steered away from reserve studies because it was putting an obligation on buildings to set aside money.”  

Capital Needs Assessments

That changed dramatically when the number of mortgages in the city backed by Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA) began to grow. “Five or six years ago, they only represented five percent of mortgages,” says Frumkin. “Today, 75 percent of condo mortgages are guaranteed by FHA, Fannie Mae and Freddie Mac.” 

This 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 ten 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. 

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