So you have a reserve fund, but with the various challenges presented by COVID-19, do you really know if it is reasonable? In these times you have to ask yourself if that amount will be enough when unit owners are not able to pay or worse yet, the commercial space your budget relies upon does the same or becomes vacant.
To have a well-dressed annual financial statement during the COVID-19 era you need to have more than just the minimum. In the past roughly $2,000 per unit held in the reserve fund was an acceptable minimum, but now we believe that you need to double that to $4,000.
We suggest doubling the amount because your reserve funds must be available to cover more than just the minimum. Think about it, if you have the minimum by spending any of those minimal amounts you would be forced to lose the designation of meeting the minimum. We all must be prepared to spend reserve funds, thus the concept that you may need to double the minimum amount to have a reasonable reserve fund in uncertain times should not be surprising.
In this era your board needs to think beyond what is available in the existing fund. Let’s face it, properties have unexpected events happen all the time and also need long term repairs. So it’s not just about ’what we have now‘, but ‘what we need in the future‘. Further, the amount of future costs cannot be predicted so it is best to err on the side of caution. Prospective purchasers will want to see an adequate cash reserve fund and although from time to time unexpected bills may show up or reserves may be dwindled down by operating losses without notice, it is imperative that you periodically monitor the activity in the cash reserve fund. This is more important now than ever.
There are three aspects of your restricted cash to consider: what you need to offset the loss of revenue and increased expenses from the COVID-19 pandemic; what’s left in the account(s) after that, and how much needs to be spent on improvements over the next few years. Your board can window dress your finances by focusing on where those funds come from which means that the receipts from owners of any specific assessments will all make it there.
There are a number of actions other than assessment that can enhance the reserve fund. If you don’t take adequate steps to protect your property you may find that after surviving COVID-19 issues, coupled with increased spending, it is quite easy to get to the point where any previously reasonable reserve fund becomes inadequate.
It is important for your board to work together on the level of reserves and the plans to replace them as needed during the COVID-19 era. By working together to window dress the reserves on your annual financial statement, you can enhance the financial success of your property.
The Czar Beer team is dedicated to providing timely, accurate information on all aspects of COVID-10 that affect our clients. However, as this is all developing quickly we are here to offer support in any way we can. You can email us at email@example.com or call 212 397 2970 with any questions you may have.