Feeding the Reserves

The reserves tell all. The reserve fund reveals a lot about how well a co-op or a condo operates. It sends a message about board planning, available resources and budgeting capabilities. We recently took over a co-op with a depleted reserve fund, an unbalanced budget, and significant financial challenges. To get this co-op on solid financial footing we had to start from scratch, and that began with creating a realistic operating budget that would not draw funds from the reserves so the board could start saving money for the capital improvements, both short term and long term.

Month by month. To help the board do that, our company produces something called the Milestone Report, which includes all contracts that need to be reviewed and approved, local law work that needs to be completed within the year and estimated project costs. It’s essentially a monthly updated reserve study that the manager literally hands to the board. All of the items are copied onto our capital budget report, which we present to boards annually to discuss where we stand with finances and what our reserve balances are. I should add that Milestone Report is not something that is presented on the audited financial statement, but an internal worksheet for boards and management, as well as engineers, to review regularly. 

Crunching the numbers. With these reports, we’re basically doing the math. You look at the total cost of capital improvements over the last 10 years and divide it by 10. If you spent, say, $1 million, you must assume you’re going to spend a minimum of $100,000 a year over the next 10 years. Then you review the projects that are coming up, put on your business hat and make your best estimate on costs, and you put the money aside for them. 

Success story. For example, there’s a building we’ve managed since 1996 that can only build its reserves from refinancing or asking shareholders for more money. It doesn’t have a flip tax or any other revenue sources. We set up a plan that adds a line item in the operating budget to transfer money, rain or shine, into the reserve fund for a rainy day. Any additional funds the co-op gets, say from renewing a laundry room contract or getting a property tax refund, goes directly into reserves. As a result, the co-op, which happens to be with the National Cooperative Bank, has needed to borrow very little money and its loan-to-value ratio is very low. Also, it’s never had to do an assessment. This doesn’t happen overnight, but with planning and teamwork and a focus on the long term.