So, you have a reserve fund, but do you know if it is reasonable? To have a well-dressed annual Financial Statement, does your reserve funds cover the just the minimum? If so, then by spending any of that minimum reserve fund would force you to lose the designation that you have a minimum reasonable reserve fund. Therefore that money may not be available to your Board since you need to maintain that minimum amount in the reserve fund to cover a tragedy and because the bare minimum for a small building in New York is $100,000, roughly enough to replace a small boiler. But what about all those other components to your property that will need to be improved or replaced over time?
Let’s face it, properties need long term repairs so its not just “what we have now, but what we need”. And that’s the part that seems to be missing from most Financial Statements of properties in New Jersey, Florida or California. That’s because those states require each property obtain and disclose a reserve study. Look at the opinion page of having your properties annual Financial Statement and see if it includes an emphasis paragraph about not promulgated a reserve study or disclosing the results. Gee, it was important enough for the accounting guidelines to include it, can the ready answers be available to resolve the concerns of such a study?
Well for the most part, the amount of future costs cannot be predicted. But conceptionally, the actions the Board takes now can offset some aspects of what’s important, that is Keeping your reserve funds replenished: Prospective purchasers will want to see a relatively adequate cash reserve fund. It may be that from time to time unexpected bills may show up or reserves may be dwindled down by operating losses without notice. That is why it is imperative for you to periodically monitor the activity in the cash reserve fund. “You won’t regret it!”
Many seem to consider two aspects, what’s in the account(s) or the balance, and how much needs to be spent. Your Board can window dress by focusing on where those funds come from. That means that the receipts from owners of any specific assessments make it all there. There are a number of actions other than assessment that can enhance the reserve fund. Otherwise, over time and spending, it is quite easy to get to the point that additional borrowing needs be utilized. If you have tried it, how has constant borrowing worked in your life?
So, what your property needs is a long-term funding vehicle. I recommend a Transfer Fee imposed on departing owners. That way, they leave behind funds to pay for the replacement of systems that they used when they lived in the building, for when they need to be replaced next. Another option is an annual allocation of monthly carrying charges to capital. In times where savings are found from things like conversion to natural gas projects and refinancing at lower interest rates, rather than reduce monthly charges, these savings can be directed to reserves. Also, periods when annual increase are low, like recent years, a percentage point here and there can supplement the reserve funds.
Together, its important to work on the level of reserves and the plans to replace them as they will appropriately need to be utilized over time. By window dressing the reserves on your Financial Statement you enhance to the financial success of your property as well.
Does your board need help with your cooperative financial statements? Czarnowski & Beer is currently offering a complimentary, no-obligation financial statement evaluation. To take advantage of this limited time offer, visit our offer page or contact us at info@czarbeer.com or call (212) 397-2970 and we will be happy to help you and answer your questions.