Are You Contributing Too Much to Your Co-op / Condo Reserve Fund? – Article by By Robert M. Nordlund, P.E., R.S
Article By Robert M. Nordlund, P.E., R.S.
You don’t want to make reserve-fund contributions that are too little, which may lead your co-op board or condo association toward borrowing, making a special assessment or even incurring the higher costs that come with deferred maintenance. But you shouldn’t put away too much, either. As a professional engineer and the president of a company that analyzes reserve funds, let me give you eight ideas how to responsibly minimize your reserve contributions.
1. Use “Cash-flow” Calculation
The best way to minimize reserve contributions is for your co-op or condo board to use the “cash flow” method of calculating your recommended contribution. The alternative “straight line” calculation method points your condo or co-op board toward full (100%) funding in a relatively short number of years.
But there’s no reason to be that aggressive. You can still achieve a fully funded objective (a good idea, by the way) using the “cash flow” calculation method. Your condo / co-op board will still get to full funding, but more smoothly and over a few more years. This can make a big difference in lowering your calculated reserve contributions.
2. Don’t Discount the Impact of Even Low Interest Rates
Some co-op / condo boards aren’t earning interest or are making insufficient or non-timely deposits because they don’t believe that 0.5 percent or 1 percent interest is worth the trouble. That’s just plain wrong. Every dollar earned in interest is one less dollar contributed by the shareholder / unit-owners.
3. Perform Timely Ongoing Maintenance
A touchup paint project, paid for through the operating budget on the high-exposure surfaces that get the most weathering, may allow you to extend the useful life of a repainting project from five years to six years. Look at it this way: Suppose a repainting project has a useful life of five years and costs $20,000. The value of its deterioration is $4,000 per year. If your board can pay for a $500 or $1.000 paint touchup to extend the useful life to six years, the deterioration is reduced to about $3,500 per years. You’ve just saved $500 a year on an ongoing basis.
This same principle can be applied to other components, including roof maintenance, gutter cleaning, carpet cleaning and asphalt cleaning and sealing.
4. Review Your Actual Replacement Needs
Don’t execute a capital-improvement project just because your reserve study indicates it that something has a remaining useful life of zero years. If a fence is still standing and strong, don’t replace it prematurely. If that boiler is still serving well, don’t replace it prematurely. Stretching the replacement cost over a larger number of years is another way to extend your reserve components.
5. Review Your Operating Budget to Verify You Are Not “Double-Budgeting”
Double-budgeting happens when a reserve project is funded both in the operating fund and the reserve fund. If you are successfully repainting one-fifth of the building every year through the operating budget, you don’t need to include a repainting component in your reserve budget. Look closely to find if this is true with tree trimming, smaller mechanical components, etc. You only need one replacement budget for a component, not two.
6. Don’t Defer Projects
Avoiding a repair or replacement project is a bad idea. Deferring the expense doesn’t just postpone the expense. because deferred projects tend get more expensive due to deterioration of underlying materials. This is especially true of asphalt, painting, and roofing.
7. Don’t Assume 50 Percent Funded Means Making 50 Percent of Your Full-Funding Contributions
Funding capital projects is expensive. Even a baseline-funding objective (where your contributions are designed to just keep the reserve fund barely positive) requires a lot of money. For this reason, baseline-funding contributions average only 13 percent less than full-funding contributions. Thinking you can cut your full-funding contributions in half typically leads to running out of reserve funds in just a few years.
8. Don’t Put Your Head in the Sand
Thinking that asphalt will “essentially never” need resurfacing, or that a roof or elevator is a “lifetime component” are both critical mistakes. Calculating reserve contributions without those influential components is irresponsible. Asphalt, roofing and major mechanical components are destined to deteriorate or fail. Ignoring that reality will only commit your co-op / condo board to an unstable financial future.
The primary responsibility of a co-op or condo Board of Directors is to maintain the physical assets of the corporation, many of which will deteriorate on a fairly regular cycle. These assets can be translated into a list of reserve components, each with its own
- Useful Life
- Remaining Useful Life
- Replacement Cost
What we’ve listed are several steps toward minimizing your reserve contributions, but it is unrealistic to expect a major, substantial reduction. Analyzing your reserve contributions in detail as we’ve described is a wise way to trim costs just enough that you save yourself from special assessments or borrowing.
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***EXTRAS***
Reserve Study Guidelines for Homeowner Association Budgets – Click here
Budgeting Whys and Wherefores – Click here
Budgeting Preparation Tips – Click here
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