The Importance of Reserves Funding the Projects That Really Matter

When it comes to multi-family communities with shared accommodations, failing to plan for a rainy day could mean that when the rains do eventually come—and they will—bailing out will be much harder, and more costly, than it might have been if certain preparations had been made before the clouds burst. 

Co-op and condo communities are set up for families and individuals to mutually benefit by living together and sharing the burdens of upkeep and governance. But these communities are businesses, and the individuals who manage co-op and condo buildings must be businesslike in preparing for emergencies such as a boiler going haywire, and for future costs, such as repairing a building’s façade or replacing its windows.

Financial consultants advising co-op and condo buildings and HOAs tell clients to keep their buildings’ reserve funds well-padded in case an emergency expense such as a lawsuit or roof-damaging storm happens and requires immediate attention. It’s not the simplest task, even in the best of economic times. Given the measured growth of the current economy, many residents are watching their costs with a gimlet eye—so these days, it’s more important than ever for boards and managers to carefully manage their buildings' reserve funds.

With the right guidance and knowledge, management personnel and board members of buildings and associations can stay ahead of any fund-related crisis by ensuring their reserves are adequately funded. It’s about purposefully planning for the rainy days which ultimately will come.

Reserve Funding Rules 

So what is the formula by which a building or association can calculate how much money it should maintain in its reserves? The answer is that there is none—no way to permanently pinpoint the oft-changing needs of the physical aspects of a multifamily building. One can certainly hypothesize about those expected costs, though. Planning of expenditures really is like hitting a moving target. The task of knowing what costs will require capital in the short-term and long-term is a never-ending job that must be evaluated—and re-evaluated—at least every few years

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Comments

  • A communication error showed up in this article. Typical Reserve contributions are 15-40% of an association's total budget, so associations only contributing the 10% FHA minimum requirement will likely be underfunding their Reserves.