Reserves To Spare

BUILDINGS CAN grow their
reserve fund by refinancing an
underlying mortgage or tapping
into a line of credit, but what we
often suggest is to finance it with
a monthly contribution from the
operating account. So if, say,
there's going to be a 2% increase
in either the maintenance or common
charges to pay for operating
expenses, we might recommend a
2.5% increase and then sweep that
extra half percent into the reserve
account so cash builds up.
When we take on new clients
that don’t have a savings plan in
place, we’ll begin a discussion
during the annual budget process
by saying, "Your reserve account
is on the low side, we need to start
to fund it, and here’s how.” Each
month, it's a journal entry where
we transfer the money from the
operating account to the reserve
account, which is in a different
bank. It’s reported on the bank
statements from both banks, and
the treasurer and the accountants
see that every month.
We will also give them blackand-
white numbers of what that
half percent would produce and
make that part of a bigger discussion
about what capital work
needs to be done. The numbers, of
course, have to be palatable. If a
building has a $2 million budget,
sweeping between $50,000 and
$100,000 a year into the reserves
would probably be reasonable.
As for who does the selling to
the board and residents, it mainly
falls on us, but the building’s
accountant and attorney could also
be brought into the discussion.
They can look at the financial
statements and confirm that the
reserves need to be built up and
explain how this affects resale
value. When people are looking to
buy an apartment, they will turn
away from buildings with weak
numbers and that have no plans to
deal with capital projects.
I think it's the least painful way
to ensure that a building has adequate
funds, unless your mortgage
is coming due and you can refinance
at low interest rates, which
have gone by the wayside now.
And I suspect lines of credit—
which now have interest rates of
about 7%—will also be a no-go
for a while. Usually we're the
ones that write the budget letters
and the increase letters, where we
explain why maintenance or common
charge increases are needed
and it’s being structured in the way
it is. I mean, no one likes to see
them, but you have to have a plan
for capital improvements and how
you’re going to get them done.