Page 8 - NY Cooperator July 2019

8 THE COOPERATOR —JULY 2019 COOPERATOR.COM BUDGET & FINANCE Underfunded Reserves The Dangers of Running Short BY A J SIDRANSKY T he importance of saving for a can have an impact on their decision to Basically, there are three approaches to the reserves, or by taking a line of credit, rainy day is a lesson we all learn as purchase \\\[in that building or associa- children. Just like we as individu- als should put away a little something for Prisand Mellina Unterlack & Co., LLP, an build a monthly line item into its com- that ‘just-in-case’ moment, co-op corpo- rations and condominium associations “If they see that the necessary improve- must also keep reserve accounts for un- expected as well as planned replacements ey to pay for them, they are comfortable. associations can also borrow money, but and repairs. The question is how much If the money isn’t there, potential buyers under different collateral arrangements, money they should keep on hand. The know there may be an assessment. It’s a which we will return to later.) answer to that depends to a great extent red flag. Many people won’t buy into’ a on what the portrait of the community situation like that.” looks like. Why Reserves Really Matter “When people seeking to buy a condo bility of the unexpected.“In a condo or are properties, though, where residents as co-ops,” says Freedland. “But there is or co-op see an anemic reserve fund, it co-op,” says Greg Cohen of Impact Real have sizable assets and prefer to keep financing available now, secured by the tion\\\],” says Jayson Prisand, a partner with ments: the board can levy an assessment; be tapped when major work is required. accounting firm in Plainview, New York. mon charges or maintenance fees; or – in equate reserves can also lead to higher ments are being made, that there is mon- Another major reason to keep capital whom a large assessment would be dif- reserves at adequate levels is the possi- Estate Management, a New York-area their money working for them, not the property management firm, “there are corporation or association. “It’s not com- unexpected situations. New York City is mon, but if unit owner net worth is high always changing laws and regulations. enough, they just assess,” says Andrew There are new regulations, and items that Freedland, an attorney with Anderson require upkeep, and these can be costly. Kill in Manhattan. “Occasionally I see For example, Local Law 11 – or the new it. Usually in small buildings with very requirement for elevators to have auto- matic door monitoring systems, which to write a large check if they have to. This have to be installed by the beginning of represents a very small minority of build- 2020. If a corporation or association is ings.” underfunded, the building has no cush- ion from these new requirements, and method of bulking up reserves is to build these are potentially expensive. You must a line item into residents’ monthly main- also be able to maintain your physical in- frastructure and do other repairs at the this money is collected and placed in the same time.” A third reason to keep reserves at ad- equate levels, particularly in co-ops, is mon practice already in place. Many unit their necessity when seeking financing. end-loan lenders for co-op and condo Stuart Bruck, a commercial mortgage purchases require that buildings have broker with Time Equities Inc., a real es- tate firm in New York City, points out that that monthly charges include a line item adequate reserves are required by banks for replenishment. For example, FNMA and other lenders when refinancing un- derlying permanent mortgages and/or or ‘Fannie Mae’), which purchases these lines of credit. “Banks require replenish- ment of reserves if they are too low when quires a 10 percent reserve line item as a refinancing an underlying permanent condition of the loan purchase. mortgage or other financing vehicles,” he says. Skimpy or depleted reserves can serves through financing. This method is not only cost you when it’s time to fix the more applicable to co-ops than condos, as boiler; they can be a roadblock to a lot of co-op properties carry underlying perma- other financial necessities. What Are the Alternatives? When considering how to maintain against the entire property because each and how much to keep in reserve, one of unit is held in fee simple as an individual the biggest factors to take into account is unit of real estate). For co-ops, reserve ac- the financial profile of the community’s counts can be replenished by borrowing individual shareholders or unit owners. and depositing the borrowed funds into funding reserve increases or replenish- the case of a co-op – borrow money, of- fering the building as collateral. (Condo ments.” The vast majority of residents in co-op look at financing of condominium asso- and condo communities are people for ciations from a different point of view. Fi- ficult to manage on short notice. There available. “Condos don’t borrow as often well-heeled owners who have the ability A more common – and less painful – tenance or common charges. Each month association’s or corporation’s reserve ac- counts. In many buildings, this is a com- not only a minimum capital reserve, but (Federal National Mortgage Association end loans on the secondary market, re- The third alternative is to replenish re- nent mortgages against the entire prop- erty (Condominiums cannot place a lien along with an underlying mortgage, to However, Prisand points out that “inad- interest rates, escrows or reserve require- Options for Condos In the past few years, some banks and other lending institutions have begun to nancing for capital improvements is now ISTOCKPHOTO.COM