The experience of condo and co-op board members can often feel like a juggling act. There are varied interests in the community that want different things. There's legal counsel, financial advisers, and managers who try to offer the best professional advice they can, and they may not always line up. It's easy to feel like the life of a board member consists of mostly just putting out fires, and never getting ahead to the important things. But some boards may not realize that many of those fires might have been preventable in the first place had members made the smart investments, and took the time to plan.
Just as an individual or couple can have a bank account or into which they can tap into in the event of an emergency, co-ops and condos need a reserve fund for planned, as well as unplanned expenses. Whether it be a lawsuit, a major repair like a new boiler or roof, or something completely devastating like Hurricane Sandy, reserve funds can offer a great deal of relief and security.
Financial planners and accountants all agree on the importance of a reserve fund. But all reserve plans are not created equal. Careful, competent, professional management is the key. If the rainy day fund can't foot the bill for an unforeseen emergency, boards could find themselves in a tough spot.
Reserve Study Needed
All of the financial professionals interviewed for this article said there is no magic formula for what makes the smartest reserve strategy for a building, although there are general guidelines.
To begin with, buildings need to have a reserve study (commonly called a capital needs assessment in New York City), which is typically done. According to Abe Kleiman, CPA and managing partner of Kleiman & Weinshank LLP in Manhattan, the study is usually done in two parts. A physical study identifies all common area components, assesses the conditions of the components and equipment, estimates the remaining life of these components and estimates their replacement cost. The financial analysis examines the status of current reserves, maps out a funding plan and identifies funding goals.