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Every building is unique in its goals, resources and its conduits to reach those goals. These should always be predetermined by management and the Board.
The answers will vary depending on the aforesaid state of your building.
If there are no goals, that’s worse!
Anyway... I have come up with a general rule of thumb for most of my buildings. It costs about $500 per unit, per year for capital expenditures. What that means is that if I have a 100 unit building, every 5 years I will have to undertake a $250K capital project.. be-it roofing, pointing, interior work, etc... This is not to be confused with the regular maintenance and operating repairs.
Now, knowing this, I have several choices... finance, budget and pay from capital reserves, take from existing reserves, assess... and so on. The answer for me is always simple. Why pay interest if you do not have to? it is a waste of SH money. What I do is take my per unit figure and put it into the budget and place that mostly into a special capital account, only to be used for these purposes. If it is a building where i did not have the opportunity to do this, then the amount currently in reserves must be analyzed in conjunction with the making of a well designed 5 year capital plan.
You also want to look at when your existing mortgage terminates, interest, the cost of the funds, time value of the money, etc... If you are financing, you want to have the P&I to be paid from your newly established capital account until you can roll it into your mortgage, or pay it off. But do not do this unless you are making provision for the annual capital average expense going forward; because, you will only be adding debt and never paying down.
Either way you are increasing maintenance for this. A separate 5 year capital assessment may be the best way since it separates the funds for accounting and in the minds of residents... it makes operating increases easier.
As long as you do not run your reserve dangerously low (and you will have a good gauge of this because you will have done a 5 year plan), you are OK. A separate line of credit (not being used) may be prudent just to have and hold in case of emergency and until the increase/assessment pays it back. If you are well planned, there is no harm, or less attractiveness to banks with the temporary lower reserve. Some uneducated buyers may frown on a low reserve until the plan is explained to them.
So, in short, only use the credit if there is a plan in place to pay back and simultaneously get financially ahead.
Hope that helps?
~AR
That is just what it is.. perception and illusion. in the end, you are paying more than you should.
Unfortunately, the transient mentality is all too common. everyone is looking for short term satisfaction (this is why we have the highest personal debt rate also). It is not prudent. However, if the corporation believes they are acting within the best interest of the shareholders, there is no illegitimacy in their duty.
You need to run for the board, or show where they are wrong via an accountant or professional letter, as to make them accountable to their fiduciary duty.
With a mtge of 150K, I would suggest to make a plan for debt elimination and capital all in one. Have your managing agent assist, or do this for you.
One of my buildings are in a similar situation (only 14 units) and we owe 148K and have some repairs, but the plan will allow us to be free of debt in 6 years, while performing capital improvements at the same time.
~AR
AR, I am on the Board, sadly, I don't have a lot to work with. What you are suggesting is what I believe in too. Are you a managing agent in the NYC area?
Yes, I am...
Feel free to email me directly if you would like off line assistance.
~AR
Thanks for all this information. How may someone contact you?
One must separate maintenance income from capital income (assessments), else the IRS will treat all as maintenance.
But, if there is a clear delineation of capital income (assessments, e.g.: accrued over ten months and kept in a separate account), then the shareholder upon the sale of a unit, can take the original price of the coop and add to that number the sum of all capital assessments as well as any self initiated capital improvements to generate an updated cost basis for tax purposes, e.g.: sale price (less expenses) – cost basis = tax burden (if any).
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This is great, thanks so much. What is unique about our building situation is there is a perception that using our credit line and paying minimum amount of interest due monthly --couple of hundred bucks-- is in lieu of ever paying back at all. Becuase these are short term owners-3 years is the average. We hava a 20 year old elevator and roof and there is no projected budget that includes these things. It's a small building and the transients just want to pass the debt on to the next owners. The minority of us are looking to own for a 10 year time frame. So how does the fiduciary duty of the Corporation impact this failure to plan responsibly for major capital repairs? The answer we get from flippers is to use the credit line and don't worry because the mortgage is small--$150,000 $ and the value of the building a few million?
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