What's In Your Wallet? The Importance of Healthy Reserves

In these times of economic uncertainty, nothing is more important than planning for a rainy day, especially when that rainy day might involve repairs to multimillion dollar buildings. That is one of the many reasons why having an adequate reserve fund is so integral to the fiscal health of any condominium or co-op community. While it seems like a monumental task to get a detailed analysis of how much money needs to be saved each year to pay for boiler repairs or façade replacements five, ten or even 30 years down the road, the ability to plan far in advance can prevent a lot of problems for boards and residents alike.

Planning for Tomorrow

“A reserve fund is really a financial planning tool,” says Mark Waldman, president and principal engineer of Waldman Engineering Consultants Inc. based in Naperville. ”It’s a road map to help people understand how much they need to be saving today to make repairs and replacements for common elements. It’s really a capital needs assessment with a financial element.”

The analogy, Waldman says, is akin to a bathtub. “The reserve fund is like the bathtub, and the fund level is the water in that tub. Future expenses are the drain. The opening of the drain is how much the needs are. The goal is to always have water in the tub, despite however many repairs and replacements are being done.”

The goal, too, is to ensure that the reserve study looks as far into the future as possible. “The length you should plan for is 30 years,” says Kevin Bobb, owner, president and founder of Building Reserves, based in Milwaukee, Wisconsin. “The main reason is that the major components of a building are the roof, siding, HVAC systems and sealants for high-rises. If you look at the useful life of those components, they’re 20 to 30 years if the building was new. You wouldn’t have very high expenses in years zero through 15 but for years 20 to 30 you will have very high expenditures.” And the key is to plan for those expenses so the residents of two decades from now are not stuck with unreasonable and perhaps unsustainable assessments and unplanned costs.

Save, Save and Save Some More

While planning is certainly of the utmost importance, it is also imperative to ensure that the studies’ findings are adhered to and an adequate amount of money is always on hand in the reserve fund. “Having adequate funds in reserves serves a number of different important purposes,” says Patrick Kennelly, CEO of the Chicago-based Phoenix Rising Management Group, Ltd. “First and foremost is ensuring that future capital repair requirements can be properly addressed. Typically, if funds are not available, the board has a tendency to defer on necessary repair or replacement requirements. If the reserves are properly funded, it is much more likely the necessary work can be completed in a timely manner. Failing to properly maintain major mechanical systems will decrease the useful life of the system and open the association up to a major systems failure.”

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