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I went to the CNYC conference last weekend and to the treasurer sessions, and I'm still a little confused on the different accounts we 'should' have and the purpose of each. My understanding: 1. operating fund (not a lot of excess in here, basically a checking account for regular expenses) 2. Reserve Fund (3 - 6 months of operating expenses as a hedge against emergencies) 3. Capital Reserve Fund: based on your 5 year plan for upcoming expenses and major repairs (boiler, elevator, local law #11, etc) or major initiatives (new roof garden, gym, etc).
Is this breakout what most people are doing? Do you then also have separate savings accounts or CDs or something for a portion of these funds so you're earning some interest within each of these funds (except Operating)?
Advice/guidance/sample splits and targets appreciated!!
Perhaps they were trying to tell you that, in addition to building capital reserves for major projects, you should earmark a portion of these reserves for emergencies. In other words, if you think that you should fund your long term capital fund with $100,000 a year, you should add $10,000 for an emergency fund for a total of $110,000. If you do not use the emergency fund that year it keeps growing. In this way, you stay on course to do your capital replacement even when you had taken money to address emergency situations.
The reserves in the form of CDs and T-bonds should be layered to provide flexibility and enough funds to take care of the emergencies, and your long-term plan. Similarly, you will not plan all the major capital expenditures to be taken care every 5- or 10-years, i.e., your boiler replacement, your roof replacement, your underground tank, window replacements, etc. These will be staggered and probably, you may have capital improvements every year according to an outlined plan. Therefore, your your capital funds should be in line with your plan in order to have cash on hand to pay for these according to the schedule.
So, in buildng reserves you should not only take care of the long-term capital plan, but emergencies by doing an add on to the amount that you will need to build.
Finally, all reserves are created equal as the color of money is the same. You will use the money from whatever maturing account you have in order to retire your debt whether it is an emergency or a planned capital improvement. The point is always add on your captital fund for emergencies which should be in accordance with the size of your building and the general coniditons of your facilities and equipment.
AdC
Thanks, but I AM confused about the color of money! I thought they were saying that if you segregate capital funds from regular (anything non-capital), there are benefits to the shareholders. Benefits like increasing the tax basis of their apartments so when they sell, the technical profit, and tax, will be lower. And also (maybe, I wasn't clear on this) that the building can apply for J51 credits for cap improvements. But, you have to tell shareholders up front that a portion of maintenance or the assessment, or however you're funding, is for capital improvements and then you would have keep that money separate from other funds to get the benefits (tax basis, J51 credits). And, your managing agent or accountant, would have to keep track of the maintenance or assessments earmarked for cap improvements.
If we don't have to keep it separate by account, it all becomes somewhat easier and clearer. But, if you don't keep it separate by account, you just indicate on reports which funds in the reserve are for what?
You ought to have a meeting with your independent accountant to go over the best way to maximize your tax basis, etc. Also, the comptroller of your management office may provide you some guidance with regard to accounts, etc.
Your operating is kept in your checking and, sometimes, depending on collections and when you pay your bills, you may have a CD associated where you can sweep your account and call from it as required in order to maximize your interest.
Obviously, your reserves are kept separately and only tapped when necessary to do strictly capital, even in emergencies. Unless I don't know what you mean for emergencies, i.e., a major unexpected leak that forces the co-op to spend $50,000 to replace with enhancement of your parking roof (just by way of example).
Your operating budget should be as solid as possible to cover all your expenses during the year. The fact that some builidngs keep the maintenance artificially low and assess to cover deficits may be a problem if you are doing assessments to build reserves and at the same time patch deficits.
In our case, we have three accounts: the operating, a tax escrow to accummulate the surplus during those months in which we have no payments to do, then reserves. We flow monies from escrow to operating and viceversa in order to pay our taxes and insurance. However, the reserves are kept just for major emergencies and capital repairs.
AdC
I don't mean CD but money market for an account to flow back and forth.
AdC
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Perhaps they were trying to tell you that, in addition to a certain amount of reserves that should be estimated for emergencies, you should have your capital fund. The cash reserve should be layered in the form of CDs and T-bonds maturing in such a way that you will have enough funds to take care of the emergencies, plus your money to take care of your long-term plan. Similarly, you will not plan all the major capital expenditures to be taken care every 5- or 10-years, i.e., your boiler replacement, your roof replacement, your underground tank, window replacements, etc. These will be staggered and probably, you may have a capital work every year and your investments should be in line with your plan in order to have cash on hand to pay for these.
So, in builidng reserves you should not only take care of the long-term capital plan, but emergencies by doing an add on to the amount that you need to build.
Finally, all reserves are equal. You will use the money from whatever maturing account you have in order to retire your debt whether it is an emergency or a planned capital improvement. The point is always make a contingency fund for emergencies which should be in accordance with the size of your building and the general coniditons of your facilities and equipment.
AdC
AdC
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