Condo Associations Should Have How Much in Reserves

Condo Associations Should Have How Much in Reserves? More buildings should have more in reserves than they may have now. 

By Ilyce Glink and Samuel J. Tamkin

Q: I’ve been reading your column about condominium reserves. It’s made me think that most condominium associations should have higher reserves

One reason to have higher reserves is that it’s more equitable for current and future owners. Let’s assume that a condo building has an expense of $10 million every 10 years. If the reserves are low, the condo association will need a special assessment to fund the expense. 

Then I own a condo for years 1 to 9, I may pay little toward that big expense. If I sell in year 10, the person who buys my home gets stuck with the entire cost of the special assessment. If the reserves are higher, perhaps even high enough to fund the $10 million expense, everyone pays a proportional part of the cost every year. It won’t matter which years they own their unit.

All owners would continue to contribute equally toward the $1 million needed annually to fund the $10 million project in year 10. What do you think?

Amount a Condo Property Needs for Daily Operations

A: You make an excellent, well-reasoned point. The counterpoint is condo unit owners aren’t always logical. They don’t always prefer to play the long game, especially when cash is tight. 

But let’s start with the biggest issue. Calculating the amount of cash a condo property will need to have on hand for staff and ongoing regular maintenance, irregular projects and special one-time repairs or replacements. 

Staffing costs are a known number. Associations have to cover the cost of security personnel, cleaning or maintenance crew, and anyone who is at a reception desk. The larger the property, the more staff that is needed. Other annual costs include building management; utilities, water and garbage. Regular maintenance for various common elements, such as elevators, lobbies, HVAC equipment, and recreational facilities, like a swimming pool, workout room, wine room, playroom, and other areas where residents and their guests can congregate or recreate. Garage and/or parking area, gardens, playlot, tennis courts, and other common areas.

Irregular costs could include painting, tuckpointing, building chimney repair, boiler replacement or elevator repair or replacement. If windows are a common element, cleaning them annually might be an expected cost. Then every 30 years, you might need to replace them. And then you might have roof replacements and building facade repairs.

Condo Associations Should Have How Much in Reserves

When it comes to deciding how much cash a building will need over a 10-year period. We can imagine vastly different numbers coming from the homeowner association and property management company. The former keeps in mind that homeowners are usually reluctant to see their assessments go up and pay more for living in a condominium building. While the latter knows if property is mismanaged, small issues can quickly become expensive fixes that are annoying to residents.

In general, we agree that many associations should have higher reserves. There are times Sam sees clients buy into a condo property that has cash reserves that seem way too low, especially if the building only has up to 6 units. These smaller condo associations pay for their repairs and improvements as they go along. When something goes wrong, current owners are asked to pitch in at that time to cover the repair. 

If you’re buying into a smaller condo property. You have to plan for these expenses as if you were buying a single-family house. When something goes wrong, expect to write a check. So Sam advises his clients to set some cash aside for emergencies and other unforeseen property expenses.

How Condo Associations Should Structure Reserves

Back to your suggestions on how condo associations should structure reserves. While we don’t know what formula each building uses when they look at the cost for the upkeep and maintenance of the building over a 10-year period. It’s possible to evaluate ongoing costs and estimate what it might cost for an extraordinary expense. If you ask for copies of the past two years of building budgets, the current budget and future projections. You can begin to imagine what kind of extra costs you might face while you live in the unit. And, you can factor that assessment into your offer to purchase.

What we do know is that higher assessments can work to depress property price appreciation. Because it lowers overall interest in that property. When condominium assessments are higher than comparable properties, buyers tend to go to lower priced buildings. If you don’t attract enough buyers, sellers may not get top dollar for their condominium unit. 

Condo properties need to look good enough to attract buyers and keep owners happy. So the board of directors of a condominium needs to balance the money. They need to manage the building’s ongoing and extraordinary expenses over time with the ability to sell units at competitive prices in the marketplace. 

A condominium association could spend willy-nilly. Improving the building, making the common areas look great and never passing a special assessment. But, we don’t live in that world. (Even billionaires can’t always agree on how to fix building problems.) Newer buildings typically need less cash for extraordinary expenses. But might need more on an ongoing basis to cover maintenance issues for a more robust amenities. Older buildings could need more, and be unpredictable in those needs, which might turn out to include several once-in-a-generation expenses within a 10-year period. 

Boards Often Have a Hard Time Convincing Homeowners to Pay More in Assessments

The whole situation becomes even more complicated when you go beyond the dollars and start dealing with the owners themselves. Owners of any tenure may not wish to spend extra cash each month beefing up the reserves. They may also not agree with the management as to how and when that cash should be spent.

In buildings where you have proactive boards and unit owners looking to keep their buildings in good condition. You’re likely to find higher reserves and a better maintained property. On the other hand, in buildings where homeowners are constantly fighting about what to do and who is paying for what. You might find lower reserves and money spent on aesthetics while longer-term problems are ignored, typically becoming more complicated and expensive. 

There are companies that consult with and advise condominium boards about a property’s physical issues. They will provide an assessment of how much useful life each mechanical or structural component of the building has left. Then, if requested, an estimate to repair or replace various mechanical or structural components. 

But even armed with that information, boards often have a hard time convincing homeowners to pay more in assessments. Some homeowners can’t afford it. Others want to sell and have the new owner pick up the cost. 

Assessing the Relative Strength of Condo Reserves

We’re often asked if there is a rule of thumb condo buyers should consider when it comes to assessing the relative strength of condo reserves. Sam has played around with this calculation. He has come up with one that seems to work pretty well for his clients. For every $200,000 of purchase price condominium, the association should have between $10,000 to $20,000 in reserves per unit. Newer buildings may require a lower number while older ones would have a higher number. It’s not a hard and fast rule. But it might help a prospective buyer evaluate whether the reserves on hand are low, adequate or well-funded.

When a home buyer reviews an association’s financials, they may see a number that looks pretty good: $1 million. But if there are 1,000 units, those reserves represent only $1,000 per unit. That may be too low for a development of that size. 

One final thought: in some parts of the country, condo reserves get prorated at closing. This means that a seller that owns a 10 percent ownership in a 10-unit building with $100,000 in reserves will expect the buyer to pay up $10,000 to the seller for the seller’s share of reserves. In this situation, a large cash reserve could cause concern for buyers who are pinching pennies to make a transaction work and quite likely send them looking elsewhere.

At the end of the day, we agree with your thinking. More condo associations should have more in reserves than they may have now. 

©2021 by Ilyce Glink and Samuel J. Tamkin.