Reserve Funds & Strategic Budgeting for Condominiums & Cooperatives
By partnering with an experienced property management company that knows how to put effective reserve-funding strategies in place, your board can properly plan for these eventualities and avoid saddling your unit owners or shareholders with unexpected special assessments.
What is a reserve fund?A reserve fund is a property savings account that serves as a cushion to protect the building’s finances from the burden of necessary future expenditures. By design, a reserve account grows over time through regular funding that comes from a percentage of your association’s monthly common charges or maintenance fees.
Your governing documents will detail if a reserve fund must be established for your property. Those documents will also outline which procedures must be followed to contribute to the reserves and if funding can be postponed or sidestepped if the majority of your owners or shareholders vote to do so.
Read more from Cooperator on how condo and co-op boards are expected to fund and maintain capital reserves.
How does a board determine the size of a capital reserve?There is currently no legal requirement in New York State for condos and co-ops to maintain a minimum reserve fund amount or collect reserves annually within an operating budget. Most attorneys and accountants, however, recommend that boards follow the Fannie Mae minimum requirement for condos. This includes funding replacement reserves for capital expenditures and deferred maintenance that is at least 10% of the applicable operating income.
Remember, every building is different and Fannie Mae's recommendation may not fit the unique circumstances of your property.
Currently, condominium and cooperative properties that do not have either a 10% reserve line item in an operating budget or a reserve study with a corresponding prescribed reserve line item in an operating budget are technically not compliant with current Fannie Mae and Freddie Mac lending requirements. Most lenders follow Fannie Mae and Freddie Mac’s guidelines for reserves in order to provide mortgage financing to owners and purchasers of condominium and cooperative properties regardless of loan amount.
It can be challenging for a board to identify all areas of the building that will eventually become outdated or fall into disrepair and require the support of reserve funds. The optimal percentage is quantified by a comprehensive physical analysis of the current condition of your property’s assets. The study identifies future replacement costs by assessing the condition of building mechanical systems, amenities and common areas to identify which items should be prioritized for replacement or repair. Upon completion, the board should be empowered to make informed budgeting decisions for long-term financial success.
It is important to treat your property assessment as a living, breathing document that should be regularly reviewed and updated. For example, the assessment may indicate that a roof should be replaced in 10 years. If eight years have passed, there is little sign of disrepair, and all recommended preventive maintenance was completed, the board may decide to go another five years before commissioning any work to replace the roof.
What is the difference between maintenance and reserve components?Properly categorizing the many components of your property is one of the challenges to managing reserves. Some items will require regular maintenance such as pressure washing sidewalks and window cleaning. Other components will need to be replaced like roofs and plumbing systems. While HVAC systems, laundry facilities and chimneys will require both.
Deciding whether these costs should be categorized as maintenance, replacement or both will ultimately determine if they will be included in your annual operating budget or as part of your reserve fund. Usually, less expensive items are included in the operating budget and costlier items are assigned as reserve components so their replacement costs can be financed over a longer period.
To protect the lifespan of your building components, you must budget for maintenance costs every year. If you don’t, the board will not be prepared to pay for repair or replacement costs and may be forced to impose a special assessment or secure a loan.
At FirstService Residential, an increasing number of boards include vital infrastructure components during the budget planning process, especially for buildings that are decades old. These components are typically designed to last a very long time, are generally out-of-sight and as a result, are often not top-of-mind when boards consider potential maintenance costs.
What are the benefits of maintaining a reserve fund?As your board takes on the responsibility of budgeting for the building, be sure to consider reserve funding, which can make the budgeting process much smoother and help keep you community’s long-term financial plan in check.
Peace of mind.A reserve fund gives board members greater confidence and comfort in knowing money will be there, when needed.
Market value preservation.Consistently funding your reserves over time is the key to protecting the fiscal health of your property. When reserves exist to support shared assets in a condominium or cooperative property, the market value of the building is better maintained.
Equitable cost participation.One of the main advantages of establishing and maintaining a reserve fund is that it ensures all unit owners and shareholders who are using and enjoying your building’s assets are participating in their costs. Without reserves, a special assessment may be needed which can cause distress or financial hardship for owners and shareholders.
If you would like more information about effective budgeting strategies and best practices for condominiums and cooperatives in New York City, download our new budget guide, 8 Secrets to a Better Association Budget Process, today.
Additional Resources: Keeping Your Budget Healthy in the Age of COVID-19The COVID-19 pandemic is creating financial challenges that we won’t fully understand for a long time. As your board takes on the responsibility of budgeting for the building, be sure to consider reserve funding, which can make the budgeting process much smoother and help keep your community’s long-term financial plan in check.
You may have issues with collecting monthly common charges or maintenance fees and your board may have to spend extra money on cleaning, disinfecting and other services to help keep your residents safe and healthy.
You know how important your budget is and what it means for the future of your building. You know that your fiduciary responsibility is one of the most important commitments you make to your fellow unit owners or shareholders and you also know that the last thing you want to do right now is raise monthly fees or issue assessments.
Click here to continue reading.