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What is a Healthy Building Reserve Fund and How to Manage It

Updated: Aug 2, 2023

A building reserve fund, also known as a rainy day fund, is an essential component of managing the financial health of a condominium or cooperative building. A healthy reserve ensures that a building has the means to pay for emergency repairs and planned updates or upgrades. In this blog post, we will explore the importance of a healthy building reserve fund, how to determine the right amount for your building, and best practices for managing it.


reserve funds for coops and condos and tips for property management

1. Understanding the Importance of a Building Reserve Fund


A building reserve fund serves as a financial safety net for a condominium or cooperative building. It is used to cover the costs of major repairs, replacements, and improvements that are not part of the building's regular maintenance budget. Examples of such expenses include roof repairs, boiler replacements, and facade renovations. Having a healthy reserve fund ensures that the building can address these needs without resorting to drastic measures like imposing special assessments on owners or taking out a loan.


2. Determining the Right Amount for Your Building Reserve Fund


There is no one-size-fits-all rule for determining the right amount for a building reserve fund. However, there are some guidelines that can help:


- Save at least 10%: A minimum of 10% of the building's income should be allocated to the reserve fund. This meets Fannie Mae and Freddie Mac mortgage lending requirements.

- Calculate your percent funded: One method for reserve planning is to calculate the "percent funded," which considers the building's reserve relative to the deterioration of common area assets. Aim for a reserve that is at least 70% percent funded.

- Consider the useful life of major systems: Estimate the remaining useful life of the building's major systems (such as boilers, roofs, and facades) and plan for their repair or replacement accordingly.

- Conduct reserve studies: Periodically commission a reserve study conducted by a licensed engineer or architect to evaluate the condition of the building's systems and estimate their remaining useful life.


reserve funds for coops and condos and tips for property management


3. Best Practices for Managing Your Building Reserve Fund


- Regularly assess and plan for reserve needs: Co-op and condo boards should work together to track the condition of major building systems and the capital funds available for their repair or replacement.

- Maintain a secondary reserve fund for unexpected operating expenses: This smaller reserve will help protect the corporation's or association's ability to pay bills or meet initial payments in emergency situations.

- Adjust reserve targets as needed: As the building ages and the deterioration of common area assets increases, reserve targets may need to be adjusted to address increased issues and repairs.

- Don't delay action: Delaying action to manage the reserve fund can lead to bigger issues down the road. Conduct reserve studies periodically to plan for additional funds or repairs needed and avoid surprises with owners.

- Explore financing options: When faced with a major capital repair or improvement, explore options such as refinancing the underlying permanent mortgage, securing a line of credit against the building, or assessing shareholders.


Conclusion


A healthy building reserve fund is critical for the financial stability of a condominium or cooperative building. By determining the right amount for your reserve fund, regularly assessing and planning for reserve needs, and employing best practices for managing the fund, you can ensure that your building is well-prepared to handle unexpected expenses and maintain its value over time.


At Domos our platform is designed to help you manage a healthy budget.

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