Why Should You Care If a Building Has a Reserve Fund?

July 13, 2015 — Most well-run co-ops and condos have a reserve fund, which you can think of as a building savings account. As an owner/shareholder, you want peace of mind that, should an unexpected capital project arise or large-scale repair be needed, the building has the funds to cover the expense. Imagine a rather large and unexpected leak in the roof causes damage to many of the building's common areas. If a building does not have a reserve fund, the owners/shareholders are responsible for coming up with the immediate funds needed to pay for that unexpected roof repair. The reserve fund makes it easier for the building's management team to expedite needed repairs.

It should be a red flag to you if a building you are looking to buy into does not have a reserve fund. When reviewing a building's financials for a prospective owner/shareholder, auditors and attorneys like to see a reserve fund that contains enough money to cover an unexpected expense or repair that could arise. They want to assure their client that the building has money to fall back on without the need to assess the building's owners/shareholders. You want to buy into a financially healthy building, one with three to six months' worth of common charges or maintenance charges in its reserve account. It is also recommended that a building set additional funds aside to finance anticipated future major repairs and replacement projects.

The reserve is a positive building asset, one that is shared by all unit-owners/shareholders on the balance sheet. A reserve fund demonstrates board discipline and healthy financial solvency.

Michael Berenson is president of Akam Associates