The primary function of a board of a co-op or condo is to operate, maintain, repair and preserve the common property. The board also has a responsibility to maintain the value of the property.
Most boards develop an annual operating budget in which they project operating expenses for the upcoming year to determine the level of maintenance or common charges required from unit owners. In addition to an operating budget, the board should also establish a capital budget to plan for current and future repairs, replacement, and improvement of major components of the property, such as roofs, balconies, the exterior faÃ§ade, elevators, boilers, and so forth. The capital budget should project expenditures for major repairs and replacement of property components for a longer period, such as five years.
In developing a capital budget, boards must decide how to fund the projected cost of repairs and replacements of the property's major components. Boards have several options: accumulating funds over a period of time, special assessments when the funds are needed, borrowing, or a combination of the above. Funds set aside for this purpose are usually referred to as "reserve funds." A properly funded reserve assures that money will be available for any major anticipated repairs and replacements.
There is no simple formula for determining the proper level of reserves. Many co-ops and condos maintain a reserve fund by falsely using informal rules of thumb (i.e., three or six months of maintenance), which may not be sufficient.
In order to determine the proper level of reserves, a detailed study should be performed. A reserve study can be done by the board, the property manager, or building maintenance staff, but is generally best carried out by a professional engineer or architect. The reserve study requires a physical analysis of the components of the common property, as well as a financial analysis. The physical analysis includes identification of the major components of the property, an inspection and assessment of the age and condition of the components, and an estimate of their remaining useful life.