Underfunded Reserves The Dangers of Running Short

The importance of saving for a rainy day is a lesson we all learn as children. Just like we as individuals should put away a little something for that ‘just-in-case’ moment, co-op corporations and condominium associations must also keep reserve accounts for unexpected as well as planned replacements and repairs. The question is how much money they should keep on hand. The answer to that depends to a great extent on what the portrait of the community looks like.

Why Reserves Really Matter

“When people seeking to buy a condo or co-op see an anemic reserve fund, it can have an impact on their decision to purchase [in that building or association],” says Jayson Prisand, a partner with Prisand Mellina Unterlack & Co., LLP,  an accounting firm in Plainview, New York. “If they see that the necessary improvements are being made, that there is money to pay for them, they are comfortable. If the money isn’t there, potential buyers know there may be an assessment. It’s a red flag. Many people won’t buy into’ a situation like that.” 

Another major reason to keep capital reserves at adequate levels is the possibility of the unexpected.“In a condo or co-op,” says Greg Cohen of Impact Real Estate Management, a New York-area property management firm, “there are unexpected situations. New York City is always changing laws and regulations. There are new regulations, and items that require upkeep, and these can be costly. For example, Local Law 11 – or the new requirement for elevators to have automatic door monitoring systems, which have to be installed by the beginning of 2020. If a corporation or association is underfunded, the building has no cushion from these new requirements, and these are potentially expensive. You must also be able to maintain your physical infrastructure and do other repairs at the same time.”

A third reason to keep reserves at adequate levels, particularly in co-ops, is their necessity when seeking financing. Stuart Bruck, a commercial mortgage broker with Time Equities Inc., a real estate firm in New York City, points out that adequate reserves are required by banks and other lenders when refinancing underlying permanent mortgages and/or lines of credit. “Banks require replenishment of reserves if they are too low when refinancing an underlying permanent mortgage or other financing vehicles,” he says. Skimpy or depleted reserves can not only cost you when it’s time to fix the boiler; they can be a roadblock to a lot of other financial necessities. 

What Are the Alternatives?

When considering how to maintain and how much to keep in reserve, one of the biggest factors to take into account is the financial profile of the community’s individual shareholders or unit owners. Basically, there are three approaches to funding reserve increases or replenishments: the board can levy an assessment; build a monthly line item into its common charges or maintenance fees; or – in the case of a co-op – borrow money, offering the building as collateral. (Condo associations can also borrow money, but under different collateral arrangements, which we will return to later.)

Read More...

Related Articles

Capital Reserve Funds

How Much Do You Really Need?

Appropriate Use of Common Funds

Handling Other People’s Money

Q&A: Capital Assessments

Q&A: Capital Assessments

 

2 Comments

  • Thank you AJ. I have a couple more observations to add. In our work for associations of all types (we've prepared over 50,000 Reserve Studies for clients in all 50 states), we counsel them to not call it a "rainy day" fund, as Reserves are truly to offset the predictable ongoing deterioration of the association's major common area elements. Reserve contributions represent the true cost of home ownership, and Reserve contributions are the way the board responsibly budgets to maintain the common areas (not relying on timing or special assessments or loans). With properly sized Reserve contributions, those predictable projects get done on time because everyone paid their fair share over the time they owned a home in the association. This limits cash flow emergencies to true surprises. Boiler, roof, elevator, hallways, lobby, etc. repairs and replacements are not surprises. When the board and the owners see Reserve contributions for what they truly are (offsetting ongoing deterioration), they bcome much more palatable.
  • Joseph S Desrosiers on Thursday, July 18, 2019 9:26 AM
    This subject is very important ,since I moved in my coop in 1988 at Sherwood Village B I have been asking the same questions I am asking of them today. We have a Board with no plan, no vision except for them to keep stating we have to get local laws done but with what money. On or about two years ago after my wife left the Board as its president there is no system of functionality and no leadership. This current Board has management sit at the table during their meeting mismanage our coop affairs and there is no fiscal responsibility except to spend our money where we don't know. Our coop has agreed with building management to have a clerk form their front office working as our building manager that is destroying our coop, management is not ordering supplies for our building, the staff is uncheck of their duty,the Board president is unable to conduct a monthly meeting and our annual meeting to elect new member. We have a by law that stated how many members we have to expect on our coop board 9 members, with election taken place every year to reflect the coop bylaw as it is written, the president who seek control want to have our coop run like Venezuela Maduro, having 7 board positions open which will establish a dictatorship under her tenure, once left the post on the board we will have a long term problem. We asked our Corporate lawyer to look into this matter, I have yet to hear from the lawyer which I am concerned about because this particular lawyer is very good. But our board intention is not good for the shareholder investment, there is no fiscal responsibility as they want a line of credit without seeking input from the shareholders who will be responsible to pay the bills in addition to their inept and negligent leadership and they must get approval of the shareholder by a tow third majority to put us all into debt.Today we are waiting for our tax abatement only to receive a letter from the building management stating that the City of New-York is updating their system and they don't know when this will be accomplished, as a shareholder I called the 311 line to fined out and send an email to Mayor Office and I am waiting. In my opinion the politician has failed us the coop industry by not making Board member liable for failing their fiduciary duty and the building management who play with our money as if they are our landlord and bring nothing to the table but their hand for their pay check and what else they can get from us by not keeping our eyes on the prize the coop funds.As shareholder and educated one we all should pay attention of our financials and the bylaw of our coop which we reside in. Board member come and go the building remain standing the last time our coop was painted the hall way was in 1993, and that was done after almost 15 years then.In today's world we need people of intelligence on any coop board and computer literate so the coop can move forward other wise these paper trail board member will lead us all into ignorance of abyss. My people in my coop wont even read the news paper from the cooperator. but they will run fast to Habitat to get fake news print out on shareholder with good intention.Why will a Board give a shareholder 12 month to 18 months to pay an assessment this is what is going on here today in our coop you cant have fiscal responsibility when type of disgusting like that is happening and management is very happy.We live in A coop not housing.