Cohousing-L Mailing List: Re: Reserves versus operational repairs/replacements

[Sharon Villines (sharon]

> On Dec 6, 2021, at 7:44 PM, PatZy via Cohousing-L <cohousing-l [at] 
> cohousing.org> wrote:
> 
> Anybody have good guidelines for what gets charged to reserves, and what gets 
> charged to annual operations for repairs/replacements?  There seem to be 
> several factors, including $ amount and frequency of repair.  We’re working 
> on how to budget/account for each and it would be great to have clarity on 
> what the parameters are for deciding. 

The primary distinction is between:

CAPITAL RESERVES — that are determined by the Capital Reserves Study, a long 
list of long lasting parts of the building and grounds that will need major 
attention, replacement or repair every 20-50 years. Some 5 years. Expected 
expenses are calculated on a 30-50-100 year basis depending on what your 
Reserve Specialist believes.

“Capital” is the amount of money you walk away with when you sell your unit. 
You want it to maintain value so you can buy another unit or whatever. Capital 
is wealth. It is independent of whether you show up for work tomorrow.

OPERATING EXPENSES —  are things that are done monthly, yearly, on a regular 
basis. They go in your Annual budget. While these things will also lower the 
value of the property if they aren’t done, they are considered the cost of 
living and not “capital.” They are things you would be paying for on a monthly 
or yearly basis as a homeowner.

Most of us are oblivious of the importance of the Reserves but they are as 
valuable as your unit. In essence they are part of the value of your unit. They 
allow you to say yes this condo is up to date and we have the money saved to 
keep it up to date. That means if I pay $500,000 for a unit, I won’t have to 
pay for the roof replacement costs next year because that money, $250,000 has 
been saved over the last 20-50 years by the previous owners.

In places where condos are hot properties — usually large cities — real estate 
agents who value return business will not sell a condo with bad reserves. They 
know they are setting their clients up for large unexpected expenses and they 
will never call that agent again. Or worse they will sue her.

We used to have a separate fund for Maintenance Reserves, things like dryer 
vent cleaning that are done every 2 years but our current Reserve Specialist 
said we can include those things in the Capital Replacement Reserve. Our 
previous one said no way — the IRS gets upset. There are ranges of beliefs 
about what goes where and it isn’t hard and fast. One person says this and 
another says that. The IRS does the same thing. The idea that accounting is a 
science is a misconception. Each organization sets up its own rules within the 
range of general best practices in accounting and the IRS rules. Not all agents 
have studied the same rules or at least doesn't apply them the same way.

MINIMUM COST OF ITEMS — Minimum amounts set for use from the Reserve Fund 
depends on the wealth of your community. Communities with very wealthy 
residents will carry the minimum in their reserve fund because (1) they can 
easily afford a sudden assessment of $5,000 for the next 6 months to pay for a 
new roof, and (2) they believe they can invest the money themselves and earn 
more than the condo association can. 

Most of us can’t do that. The best way to preserve affordability is to have 
good savings so no one has to sell when the siding starts deteriorating, there 
are no saving to pay for it, and their monthly fees double or triple.

One way to decide what the minimum expense to be paid for out of the reserves 
is to estimate how much you can absorb in the annual budget for unexpected 
expenses. Reserve Funds are invested in accounts that are not like bank 
accounts. You don’t just withdraw funds on a regular basis. The longer they are 
invested the higher the rate of return. Withdrawing them earlier, as in selling 
CDs, may incur fines. 

For many years we had a minimum of $500 because we were sure that in most cases 
we could juggle expenses and have that much available as cash. Now our annual 
budget is much higher and our reserves have accumulated. We haven’t formally 
raised our minimum, but we often pay for things out of the operating budget 
that technically could come from the Reserves but we would then just start 
putting the money back anyway.

With rising real estate prices and the recession, some are questioning that. 
They would prefer to have the over budgeted amounts refunded to owners instead. 

Budgeting is an art, not a science, because there are so many variables and you 
are projecting for the future, which no one knows. But using past history is 
probably the best guide.

Sharon
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Sharon Villines
Takoma Village Cohousing, Washington DC
http://www.takomavillage.org