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Two questions please...
what is the average amount of money in reserve for a coop with 300 apartments.
Also, is it usual to have a mortgage that balloons after 7 years. This is a second mortgage to pay for improvements that was not covered in the reserve.
Thank you.
Our accountant recommends that we hold 2-3 months of maintenance even if a building is in excellent physical condition. Of course, no building is in perfect shape, so he then recommends holding an amount in reserve equal to the expected cost of upcoming capital projects. He views the 2-3 months of maintenance as a contingency, e.g., you think the roof is in great shape but it turns out it needs considerable patching. When I checked with our property manager, he said that most buyers' attorneys have told him they look for 2-3 months of maintenance as a minimum and then read the Board minutes to see if any capital projects are coming up. If so, they then want to know how those projects will be funded. Based on this, I'm guessing our accountant's advice is a rule-of-thumb.
Good reply - but also your Certificate of Incorporation should also have a specified amount that must be kept in a reserve account and also if you have a mortgage you will also have to keep money in special account for that - I also agree that it is better to reserve for capital improvement than borrow - if you can set aside amount that is deducted for depreciation - that is noncash amount but could be put into reserve account for replacement - because all these things boilers, sidewalks, etc have to be repaired and replaced - Unfortunately in mine like so many coops they don't obey the law and don't understand and that is why buildings go bankrupt
Both our comptroller (the managing agent's accountant) and independent account say that a reserve fund equal to 3 months' maintenance is a good goal. Mind you, that's a minimum goal. Certainly, 6 months' worth is fantastic.
With lots of extra money you can pay capital improvement bills up front; you can invest it (wisely & safely!!!) to earn more interest than a savings account; you can pay down principal of your mortgage; if you're truly flush you could even give some back to shareholders (with, say, one month without a maintenance fee).
Before you do any of those, however, be sure you run it by your accountant(s), your lawyer, your managing agent, and of course your fellow board members!
Steve
It is not unusual. I even thought about one a while back when we held a self-amortizing mortgage at 10.3% INTEREST(Yes!!! - huge burden) in which for the first 10 years the co-op could not be refinance. OUCH!!! VERY PAINFUL! Therefore, since we lacked money to do bladly needed capital investment, and the intersts rates had come down by our 5th year of that burdensome penalty, I thought that a second mortgage with continguous expiry would have been a solution to our needs then. The second mortgage was going to be done through the same bank that held the first self-amortizing mortgage.
Again, you may think WHAT a bad thinking? Well, at the time there were no lines of credit being given; so, it was out of the question. Also, the capital improvements if they would have been done then, I'm sure would have saved a bit of money. There are times in which capital improvements are like CANCER. If you do not catch them in time, the costs will be 3X greater.
However, you should weigh your alternatives quite carefully.
AdC
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Sandy - How much to have in reserve depends on many factors including the type/age/condition of the bldg. How and when to build up reserves should also be an ongoing function of a responsible board. It's tough keeping up with expenses and eliminating payables but a small increase or assessment now that's spread over time and won't make a major monthly dent in shareholders' wallets can give you most or all of the $300K for the new boiler or roof you'll need in a few years so you don't have to touch a line of credit or take out a loan to pay for it. Planning ahead for the "known" also lets you preserve your reserve for the "unknown".
Someone told me a good rule of thumb is to keep 6 months maintenance in reserve. Our posters here who are financial mavins can say if that makes sense. I'm just passing this along. So if a coop collects $50K a month in maintenance, its reserve fund should be at least $300K.
I'd appreciate hearing other opinions on this.
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