Worst-Case Scenarios When the Reserves Won't Cover It

You always want to feel safe in your home, but as the past few years have proven, you never know when a major calamity or weather disaster is going to strike. While most of New York City proper wasn’t hit as hard by Superstorm Sandy as some other states last year, it did open some eyes in the condo and co-op communities about what could happen to the property if something major was to occur. After all, insurance doesn’t always cover everything.

Any financially solvent co-op or condo building has both an operating budget to cover day-to-day expenses associated with running the building, and a reserve fund that’s intended to pay for larger repairs and capital improvement projects. Still, you can’t plan for everything and not having enough funds in an emergency can be the downfall of any building.

“Some situations that may land a residential common interest community such as a co-op, condo or HOA in financial jeopardy include major capital projects that weren’t funded appropriately, being over-leveraged in terms of debt because the building has borrowed too much, an increase in interest rates and a failure to pay down debt, an unrealistic operating budget based on the board’s fear of instituting an increase in maintenance/common charges, and financial malfeasance on the part of the board and/or management,” AKAM president Michael Berenson says. “A board should be able to rely on management to raise red flags long before such situations devolve into a serious financial problem.”

Bruce A. Cholst, a partner with the law firm of Rosen Livingston & Cholst LLP in New York, says all these scenarios presume that they didn’t provide for a safety net.

“Think back to Hurricane Sandy or a catastrophic event like a fire or any other act of God, which causes extensive damage to the building or common elements,” he says. “With a combination of no reserves, it will put the building in financial trouble.”

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