Protecting That Nest Egg Called the Reserve Fund

Like any co-op or condo board, you keep a reserve fund for capital projects and emergency repairs. In fact, the New York Cooperative Corporations Law requires that boards "periodically set aside reasonable sums for reserves," while the Reserve Fund Law requires it of buildings converting to condominium.

Most boards, wisely, don't gamble with the stock market but keep their reserve funds in FDIC-insured money-market accounts and certificates of deposit (CDs), as well as in iron-clad Treasury bonds. The downside is that though interest rates have begun inching up, they’re still low. If they’re below the rate of inflation, your safe investments could be money-losers. 

Can you maximize your reserve's potential without adding risk? Andrew Dreisiger, an assistant vice president at Wells Fargo Advisors, suggests you can, advocating that boards adopt a common tool called an investment-policy statement.

"An investment-policy statement is a guideline and a framework for how the building's money can and should be managed," Dreisiger says. "It can be changed and amended as necessary from the board's perspective, the building's perspective, and from changes in market conditions and interest-rate environment."

Anywhere from two or three paragraphs to a few pages long, depending on how detailed a board wants to get, an investment-policy statement provides "an ongoing document as people rotate through the board," Dreisiger says. "It's shown to all the shareholders and unit-owners, and it outlines what can and cannot be done with the reserve funds, meaning which cash-management instruments can be purchased and which ones cannot, and the reasons why and why not."

A financial advisor, he says, can help "professionalize the statement." This means analyzing potential investments "to efficiently plan for capital needs" by balancing liquid reserves – cash you can access immediately in case of an emergency expense – with higher-interest investments such as CDs and bonds, in which your money is locked in for a certain period and can't be accessed without paying penalties. And while Dreisiger does not recommend purchasing equities or stocks because they can be volatile, he believes that, "There are senior secured bonds of companies with enough cash reserves to meet their obligations."

Such advice doesn't come free, of course. "There's an investment-advisory cost," Dreisiger says, but "no transaction costs" at Wells Fargo. "The rate is dependent on the size of the fund and how involved a board would like us to be."

For co-ops and condos without very large reserve funds, it might not be worthwhile to hire a financial advisor, argues David Goldstick, longtime board treasurer of the 57-apartment co-op at 450 West End Avenue in Manhattan. "I would be shocked if more than 10 percent of the condos and co-ops in this city have a reserve fund big enough that you would want to start thinking about investment policy," he says. "If you're lucky enough to be a board with $3-4 million in reserve, then you've got to start talking investment policy. But I would suggest that with $500,000 or less, the only issue is liquidity."

For those co-ops and condos with reserve funds in-between, the extra revenue of a longer-term investment or a higher-interest corporate bond might not be enough to compensate for the lack of liquidity or any potential risk, Goldstick says. "If you're talking a one percent difference in return" for buying a five-year CD instead of a one-year, for example, "and you have a reserve fund of $500,000, you're talking $5,000 a year difference for five years" while that portion of your reserve remains inaccessible.

Each board, of course, will have to determine the best way to manage that precious nest egg known as the reserve fund.