Here’s a question for board members – we all know you should have a reserve fund, but do you know if it’s reasonable?
To have a well-dressed annual financial statement many board members think it is fine for the reserve funds to just cover the minimum. However, many forget that by spending even the smallest amount of that minimum reserve fund you would be forced to lose the designation. Furthermore, that money may not be available to your board when you really need it since you need to maintain that minimum amount in the reserve fund to cover a tragedy.
Think about it – the bare minimum reserve fund for a small building is $100,000, which is roughly enough to replace a small boiler. What about all those other components of your property that will need to be improved or replaced over time?
The truth is properties need long-term repairs, making it better to not only focus on what you have now but what you need in the future. Unfortunately, this key section is one that seems to be missing from most financial statements of properties in New Jersey, Florida, and California.
This is because those states require each property to obtain and disclose a reserve study. Look at the opinion page of your property’s annual financial statement and see if it includes an emphasis paragraph about funding a reserve study or disclosing the results. If it was important enough for the accounting guidelines to include it could the answers possibly be readily available?
For the most part, the number of future costs cannot be predicted, but it is still true that the actions the board takes now can offset some aspects of that. Remember, what’s important is keeping your reserve funds replenished as prospective purchasers will want to see a relatively adequate cash reserve fund.
From time to time unexpected bills may show up or reserves may be dwindled down by operating losses without notice. That is why it is imperative for you to periodically monitor the activity in the cash reserve fund.
Many boards seem to consider two aspects: what’s in the account(s), and how much needs to be spent. Your board can window dress by focusing on where funds come from.
There are a few actions other than assessments that can enhance the reserve fund. Otherwise, over time and spending, it is quite easy to get to the point that additional borrowing needs to be utilized.
What your property needs is a long-term funding vehicle. We recommend a transfer fee imposed on departing owners. That way they leave behind funds to pay for the replacement of systems that they used when they lived in the building for when they need to be replaced next.
Another option is an annual allocation of monthly carrying charges to capital. In times where savings are found from things like conversion to natural gas projects and refinancing at lower interest rates, rather than reducing monthly charges, these savings can be directed to reserves. Also, periods when annual increases are low, like in recent years, a percentage point here and there can supplement the reserve funds.
It is important for your board to work on the level of reserves and plans to replace them as they will appropriately need to be utilized over time. By window dressing the reserves on your financial statement you enhance the financial success of your property.
With over 35 years of experience serving co-ops and condos, the Czar Beer team can outline specific steps you should take to minimize taxes, maximize loan eligibility, and enhance the value of your property. For more information, contact us at info@czarbeer.com or (212) 397-2970.