Protecting Your Reserve Funds Prudent Investing Is Key

With the stock market chugging along and the Great Recession of the late 'aughts in the rearview, the question might occur to some financially-savvy board members: Are our building's cash reserve assets performing at their best? Could they be better? Should our funds be invested in the most conservative manner possible, or should our association or corporation jump onto the stock market bonanza bandwagon?  According to the professionals who spoke to The Cooperator on the topic of reserve investments, the answer to that last question is a resounding No.

What’s Required?

According to Mark Hakim, an attorney and Director of the Cooperative and Condominium Department for Manhattan-based law firm Chaves and Perlowitz, “Except in the case of a conversion, there are no legal requirements with respect to reserve funds, though there has been discussion in the past about legislatively requiring one. Note that a reserve fund must be established pursuant to the Reserve Fund Law for conversions and that a working capital fund, which may be established by a sponsor or board, is not a reserve fund.”

“The board of a condominium or cooperative is charged with the responsibility for investment decisions,” Hakim explains. “Often a board will rely upon a managing agent and/or the building’s accountant to determine where and how to invest.  Usually, a building tries to stay with safe investments; bonds, treasury bills or money market accounts are the customary investment vehicles. However, as the amount of a building’s reserves increases into the millions, boards may engage institutional financial advisors to assist with their investment plan.”

Liquidity First

The most important consideration for co-op and condominium boards when contemplating investment of their reserve funds is liquidity. According to Karen Sackstein, an accountant and a partner at The Condo Queens, an accounting firm located in Fair Lawn, New Jersey that specializes in condominium associations, “Liquidity is defined simply as money you can access right away.”  While the standard accounting definition of 'liquid' is anything invested for less than 90 days, Sackstein believes that’s not liquid enough for condo and co-op situations.  “Reserve funds will have a combination of liquid instruments,” she says, “typically, [condos and co-ops use] money market accounts and/or short-term certificates of deposit (no more than 30 days).  These instruments can all be accessed without penalties for early withdrawal.”

How much should be kept in cash or near cash equivalents depends on an array of variables.  These factors include the extent of common elements, the replacement cost of those elements, and the age of the property. So for argument’s sake, consider a townhouse style condominium complex where members maintain their own HVAC systems within their units. A community with this situation would probably require less cash for reserve funding then, say, a high-rise apartment building with an equivalent number of units that has central HVAC and elevators, which are expensive systems to maintain or replace.  Sackstein recommends that her clients keep two to three months worth of working capital on hand at all times. That way, “If there is an emergency, the association will have a cushion and won’t incur early withdrawal fees on invested reserve funds.”  She advises her board clients “never run too close – because it’s not your money!”

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