Don’t Raid the Cookie Jar Capital Budgeting is Essential

Sometimes the future seems like it’s an awfully long way away. If a roof is going to last 30 years, why should we worry about it today? Same with that shiny new boiler, HVAC chiller or that flat, crack-free pavement just poured two summers ago. Eventually, though, everything new grows old. Wear and tear sets in and soon, those elements we thought would last forever are in need of repair or replacement.

That is where a reserve study comes in handy—very handy, in fact, because it means your co-op or condo community has been socking away savings for years in order to pay for those big replacements and repairs.

A Changing Landscape

Handy as they are, reserve studies have not always been as common, or as necessary, as they are today. That changed dramatically when the number of mortgages backed by Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA) began to grow. “Five or six years ago, they only represented five percent of mortgages,” says Mitch Frumkin, PE, RS, CGP, president and founder of Kipcon, a full service engineering firm headquartered in North Brunswick. “Today, 75 percent of condo mortgages are guaranteed by FHA, Fannie Mae and Freddie Mac.”

This tilted the scale in favor of reserve studies because “they have regulations for insuring mortgages and in order for it to be guaranteed, there are certain requirements that have to be met,” Frumkin says. One of those requirements is that ten percent of the budget must be set aside on an annual basis for future repairs, or the board must do a reserve study that shows they can afford to put aside less.

“In a high rise, you can have a $7 million budget, and ten percent of that is $700,000” so that is what must be set aside each year, says Frumkin. If a reserve study is done, though, analyzing exactly what replacements and repairs must be made in the years to come and how much needs to be saved to pay for them, the number will likely be significantly less. “You can pay $15,000 for a reserve study and save hundreds of thousands of dollars,” Frumkin says.

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