The Meter is Running
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Low reserve funds can spell disaster for your building, which is why loans are important.
AUTHORSteven W. Birbach, Vanderbilt Property Management
PAGE #pp. 94-95
Refinancing or taking out a line of credit only work to build up your reserves when you successfully plan for all potential costs.
We have a 40-unit co-op on the East Side that does not have a lot of money in its reserve account. The co-op refinanced about two or three years ago. At the time, we begged the board to take more money because, being in the property management business for more than 30 years, we know that boilers go, parapets go, water tanks go, pumps go, and elevators go. But co-ops are reluctant to borrow more money. Most boards don’t want to over-leverage. Now, in this co-op, three years later, we had to replace an aging elevator.
We hired a consultant, and when we got the bids back, it was upwards of $250,000. They didn’t have it. I went out to the bank holding the first mortgage, and I said, “Guys, we’re redoing the elevator, and it’s going to cost $250,000. We may ultimately have to do the roof. So we’re going to need a line of credit or a second mortgage.” I explained to the board that there were three options to raise money: assess the shareholders, get a line of credit, or take out a second mortgage. We went through which option was best in terms of cost: if we did the line of credit, and just paid the interest, on average, it would be less than $40 a month per person by the time the mortgage expired in seven years. That’s clearly the easiest way to do it because it’s adding a small amount each month to each shareholder’s bill.
The takeaway is that, if you have an experienced management company, it’s going to find alternatives for you to get your capital projects completed. Don’t just say, “Oh, we have to assess everyone $10,000, and we need it tomorrow.” There are ways. Generally, the building has so much available equity, and with the low interest costs today, it makes sense to use that equity and pay off the loan gradually over time.