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 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 the co-op or condo community has been socking away savings for years in order to pay for those replacements and repairs.

Industry Changes

“The Illinois Condominium [Property] Act does not state a specific dollar amount that a community needs to set aside for reserves,” says Joseph Baez, CMCA, AMS of Advanced Property Specialists, Inc. “The most effective way of achieving this is through the results of the reserve study.”

Knowing what your association needs, or might need, offers more than just peace-of-mind; there are other reasons why having adequately funded reserves is prudent. “Five or six years ago, mortgages backed by Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA) only represented five percent of mortgages,” says Mitch Frumkin, PE, RS, CGP, president and founder of Kipcon, a full service engineering firm in North Brunswick, New Jersey and co-author of Community Associations Institute (CAI) book Reserve Funds: How & Why Communities Invest Assets.

“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 continues. 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.”

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