Death and taxes are not the only certainties: your building’s major systems and components will not last forever. What happens when your board does not set aside funds on a regular basis to account for future repairs and replacements? Big special assessments.
Which building systems and components should your board be prepared to shell out reserve funding for? Anything that is a common area maintenance responsibility that exceeds a certain minimum threshold cost, and has a limited lifespan:
If you live in a coop building, the building’s underlying mortgage should also be a reserve item, as your board should be monitoring and planning for the appropriate time to refinance. The ideal mortgage for a coop is one that amortizes, paying interest and principal.
While reserves are mandated by law in some cities or states, New York City has no such requirement. This means that some NYC buildings do nothing, while others simply perform a capital-needs assessment to determine what building systems will need replacement. However, this assessment does not take any steps to ensure that funds will be in place to pay for those replacements.
What should your building do to be prepared for the inevitable? Conduct a reserve study utilizing an engineer who is a reserve specialist and/or a professional reserve analyst. Once the study is completed, your building should decide on an appropriate funding plan. The building’s accountant or another financial adviser should take part in the reserve study to advise on where to invest funds. Your building should also ask its insurance adviser to weigh in on insurance costs, deciding what events to cover, and to what extent.
No matter your building’s approach, building life involves certain inevitable repairs, and a host of things that cannot be predicted. Will you and your fellow owners or shareholders be prepared to face what’s coming around the bend?