(Editor's note: for an earlier, in-depth discussion of using reserve funds in emergencies, click here: https://chicagocooperator.com/article/tapping-reserves-in-a-time-of-crisis)
Reserve funds are a normal - and crucial - component of the budget for any condo or HOA community. Lenders of all types - whether it be the banking institution that holds the underlying permanent mortgage on an entire co-op building, or the mortgage company that originates loans for individual units - look to reserves as a key indicator of a property’s overall financial health. Many lenders stipulate that reserves be maintained at a specified minimal level at all times. It’s money saved for a rainy day - that rainy day when the roof needs replacement, or there is an unexpected burst pipe, or even a fire that does extensive damage to both individual units and common areas.
Types of Reserves
Reserves generally fall into two categories: operating, and capital. Operating reserves are a contingency built into the budget specifically to cover unexpected increases in regular, recurring expenses. This typically excludes cash earmarked for specific, finite projects, initiatives or essential future spending such as capital improvements. For example, there may be a sharp, unexpected increase in the cost of oil or gas for heating. The association or corporation has budgeted a specific amount for heating fuel based on the prior year’s usage plus some small cushion. When that cushion has been exhausted, a board may choose to use their operating reserves to cover the increased costs, rather than ask unit owners for a maintenance increase or assessment to cover the increased costs.
Capital reserves, on the other hand, are monies segregated for capital projects such as boiler or roof replacement. These reserves are mandated by various regulations put forth by a variety of concerns, including state/local government agencies, mortgagees, and often co-op and condo governing documents. These monies are to be specifically used for upkeep and replacement of critical building and community systems.
What About Emergencies?
So, your community has saved for a rainy day, and that rainy day has arrived -- in the form of the COVID-19 crisis. No one, anywhere, provided for literally thousands - or even tens-of-thousands - of dollars’ worth of personal protective equipment (PPE) and gallons of now-essential cleaning products in last year’s budgeting process. So how will condo association communities pay for this increase in costs?