So, you have a reserve fund, but do you know if it is reasonable? To have a well-dressed annual Financial Statement you should. But does yours cover the just the minimum? If so, then spending any of that minimum reserve fund would force you to lose that designation, that is that you have a minimum reserve fund. So that money may not be available to your Board since you need to maintain that minimum amount in the reserve fund to cover an unexpected cost. The bare minimum for a small building 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 the plan is”. 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 to obtain and disclose a reserve study. Look at the opinion page of your properties annual Financial Statement and see if it includes an emphasis paragraph about not having 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 accurately determined. But conceptually, the actions the Board takes now can offset some aspects of what’s important. By keeping your reserve funds replenished, prospective purchasers will see a relatively adequate cash reserve fund, even though there may from time to time be unexpected bills or reserves may be drawn down by operating losses without notice. That is why it is imperative 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. This means that receipts from owners of any specific assessments make it all the way to the reserve fund. It’s not enough to just assess for the capital required, but then the assessments must be collected, deposited, and ultimately transferred to a specific reserve fund bank account. 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. Transfer fees can take several different forms, including some multiple of monthly maintenance or common charges, a small percentage of the sales price, or a somewhat larger percentage of the seller’s profit. Another option is an annual allocation of monthly carrying charges to capital. In times where savings is 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, as in 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 financial success of your property as well.
Whether you are a business, individual, or non-profit – we will outline specific steps you can take to minimize taxes, maximize loan eligibility, or enhance the value of your property. With one call or email we will provide you with a professional, complimentary financial Statement evaluation – no obligation. Just visit Czarbeer.com/offer or contact us at info@czarbeer.com, or call (212) 397-2970 and we will be happy to help you and answer your questions.