Hi Ed,

Is that a per year amount? That sounds real low. As of 12/31/2011, we had $959k in prepaid expenses, reserves and voluntary self escrows or close to $8,640 per unit. This exceeded our yearly revenue, yet, we consider this amount to be low.

New regulations from Freddie Mac and Fannie Mae state a target of 10% of revenue per year in order for them to approve mortgages for new buyers. As a result, we are phasing in a permanent assessment at 2.5% of maintenance per year so that we reach 10% within 4 years. While the regulations are currently on the books and enforceable, we have other money flowing to reserves this year to cover the 10% (treasury stock sales).

Each complex is different. I would feel better if my co-op had at least $10,000 per unit in reserves.

Steve

All of the above is incorrect ! This is a basic simple matter that has now been enforcable for 36 months...

not to be 'debated'

Back to the point - i am told it is the norm with UWS coops to basically keep about 6 months of operating costs in their reserve and this is just fine. $8,600 per unit sounds out of wack. Unless you are talkign about something else.

Its ok, my board and the sponsor do not belive we should increase reserve fund or make provisions in the budget to upgrade our building. When asked how this will effect sales, they state that "we will cross that bridge when we get there". So in the end, unlikely to sell our apartments. Stay tuned could be a good legal case in a year from now.

Do you have proof, or are you going to continue to provide irrelevant responses?

Steve- There is an interesting reprint here (http://www.czarbeer.com/pdf/C&B-Habitat-1110.pdf) of a Habitat Magazine article about the Freddie Mac/Fannie Mae 10% reserve requirement. According to the article, the 10% requirement is for condominiums only, and does not apply to co-ops. It also originated in Florida, where the financial stability of condo developments is much less secure than it is in NYC.

In an article in The Cooperator (http://cooperator.com/articles/1948/1/New-Rules-for-Co-ops-and-Condos/Page1.html) it states, "Capital reserves must represent at least 10 percent of the budget." This is not the same as 10% of revenue per year. Although a capital reserve balance equal to 10% of the annual operating budget is very low (33% to 50% is much more fiscally prudent), tacking on a 10% surcharge every year for the capital reserve account seems like an unnecessary burden unless you are anticipating large capital expenses in the next 5 years or so.

Can you provide any links to where you read the requirement was 10% *per year*? This is something I am very interested in. Thanks!

Hi Steve,

I have tried reading the Selling Guide myself and I have also heard the of the Florida and condo connections. I cannot yet link the condo standards to be the same as co-op standards. I have e-mailed Fannie Mea and I will share their response here if and when I get it. That being said, the real estate professions writing on the topic have equated the two.

Assuming they are the same then, in my mind, there are two distinct topics: the regulation; and then the enforcement. If the regulation is there then we should be aware of it as Board Members. If we decide to ignore it (or we don’t know of it), we risk breaching our fiduciary duty and open ourselves to legal actions.

The enforcement is out of our control. The authorities will enforce the regulations as they see fit. For me, I do not want my shareholders to be the test case if the authorities decide to enforce here in NY, NJ and CT. To me, that is a harder discussion to have with my shareholders (buyers for units can’t get mortgages) than hey we have to raise reserves (we really all know it anyway).

I work in accounting and finance at a very large insurance firm. One of the tests for risk we use is “do you really want to have some issue playing out in the press” (press here could mean “the press” or shareholders)? If you don’t want to face that potential outcome, you avoid it.

Habitat Magazine published an article on the topic called The Loan Arranger: Top Fed Guidelines Co-op / Condo Boards Need to Know by Jennifer Hughes.

I have also inquired with Fannie Mae about the 10%: if it is a minimum or an annual amount to be accumulated if not used. In my co-op we have capital projects every year. Even if we didn’t, it is in the best interests of the shareholders to reduce costs. Accumulating funds ahead of time for a capital project lowers the project’s costs due to reduced borrowing needs. In my co-op, we have taken all of this to mean an annual funding as there will always be something to repair. Finally, we don’t want to be just a “minimum” requirements” community. Whether in finance or building operations, we just don’t want to live that way.

Great questions and sincerely,

Steve

Hi Steve - Thank you for the information and your analysis. Your insight is very helpful.

I had been hearing about the "10% rule" and always assumed it meant that the Feds were finally requiring condos (and I guess co-ops by extension) to accumulate at lease *some* reserve funds. We read on here and in the property management press like Habitat and Cooperator about enough buildings that don't have any reserves and the problems they get into. It seemed like the Feds were using the hammer of not approving loans to convince these buildings they really needed to create a reserve fund of at least 10% of their annual budget.

We do not have a capital project every year (whew!), so I now understand why you must keep replenishing your reserve fund. Unfortunately I have board members who think the operating account and the reserve account are interchangeable, so I have to keep large amounts in both so expenses can be paid from the proper account without having to shift money around.

Please post any responses you get from Fannie Mae about the interpretation of the 10% rule. I would like to know what they mean, and I am sure others on here would also like to know.

--- Steve