Apartment Values Drop When Condos Can't Put 10% in Reserve. However...

Here's what's going on. The 10-percent reserve requirement has been on the books for a while, but Fannie and Freddie are now enforcing it. What this means for a condo board is that it needs to set aside 10 percent of its income — every year — for capital improvements.

Ten percent can turn out to be a pretty hefty sum, which is probably why many condos have come up short in the reserves department. But there is a way to bypass the requirement: Show the lenders you don't need that much money.

Study Up

You can do that by commissioning a reserve study, a budget-planning tool that combines a physical and a financial analysis of your building. It offers specific recommendations for how much money a property should build into its reserves, while backing up that recommendation with detailed suggestions for what repairs will happen, when they will happen and how much they will cost.

At  one Manhattan condo, the board struggled to set aside a whopping $500,000 every year — 10 percent of the $5 million income it collected. But as a newly constructed building, it was unlikely that the condominium would actually need that much cash for capital improvements and repairs.

"There was no way that a new-construction building was [going to be] able to save that much money," says Rebecca Farley, a property manager with Douglas Elliman Property Management. So the condo commissioned a reserve study, which forecast considerably less money that needed to be put away each year. In fact, many new condos decide to conduct reserve studies when they finish construction specifically so that they can meet the Fannie Mae and Freddie Mac lending guidelines.

Shoddy New Construction

Of course, this becomes problematic in cases of shoddy new construction, which happens more often than we'd like to think. In such instances, new boards or residents' groups generally must negotiate with or even sue the developer to get the money to make needed repairs. And during all time that takes, the Fannie / Freddie requirement doesn't go away.

Likewise for older condos: Your building's financials must satisfy the Fannie and Freddie rules. If not, sellers won't be able to find buyers, and apartment values could drop. The best bet for these condos is to either structure their budgets to meet that 10-percent requirement or conduct a reserve study to prove it's not necessary.

Adapted from "Preparing to Repair — Year by Year" by Ronda Kaysen and Jason Carpenter (Habitat, June 2014)

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