What if your building’s boiler breaks down, or a hailstorm necessitates major emergency roof repairs for your association? Of course the first question that arises in these situations is whether your HOA’s reserve fund is adequate to cover the necessary repairs—but perhaps an even more important question is, does your reserve have enough liquidity that funds are readily available when you need them? After all, money it in itself is useless if you can’t access it and apply it where it’s needed.
Know Your Needs
A co-op or condo’s reserve is meant to cover expenses that exceed its normal operating budget—things like major capital improvements, unexpected repairs and the replacement of building systems. In this time of failing banks and falling markets, it’s important to take a closer look at your reserve fund—no matter how healthy and wisely invested you believe it to be.
“Many condominium documents and homeowner association documents describe the creation of a reserve fund,” says Stuart Lieberman, Esq. of Lieberman & Blecher, P.C. in Princeton. “Often, the governing documents will identify the kinds of financial instruments that can be used in order to grow the fund. In general, these will be secure, less risky kinds of investments, such as highly rated bonds, and low risk stocks. While the return may not be as great with these investments, they are secure and the money will most likely be available when it needs to be spent for the specified purposes.”
Some co-ops and condos build their reserve fund with flip taxes or transfer fees, while others put a line item in their annual budget that goes toward the reserve. Some assign transfer fees or capital contributions collected at the time of sale, and buildings with rental income often earmark that money for the reserve. Reserve money can also come from refinancing.
Wherever reserve funds come from, they are managed by a the building or association building’s board, whose members in turn are elected by residents to make sound business decisions on their behalf—and these days, that’s no small task.