Normal Reserve Amount

I think it is hard to come up with a one-size fits all answer here. I think knowing more about the number of units and size and age of building would help along with what it is a building has to maintain. For example, rooftop pool, walkup versus building with 4 elevators, postwar versus 150 year old town houses joined into coop,etc.

The coop should keep an amount consistent with the expenditures they plan on making to maintain their physical plant. At a minimum they should probably be adding an amount equal to 10% of their annual budget(consistent wiht Fannie/Freddie Condo lending guidelines)

a seminar I went to years ago had an attorney speaking on diligence and mentioned something like 4x monthly operating expenses for the bldg...as a boundary for cash reserves to be considered healthy. Of course more is involved but that is what he said. So if every resident defaulted, the bldg will have 4 months of operating expenses covered in its reserves.

Of course there's nothing morally wrong with an assessment. The building earns a sub par return on unspent cash.

What's a reserve?

The rule of thumb is in my Moneywatch article here: http://moneywatch.bnet.com/saving-money/blog/ask-agent/are-my-co-ops-maintenance-charges-fair/589/

But both riversider and 30yrs are right too -- there are buildings that choose to run without reserves because they fear if they have it, they'll spend it. There's nothing wrong with that as long as you know what you're getting in to.

ali r.
{downtown broker}

^ into. Post-holiday tiredness, I apologize.

Thanks, all. I can totally understand how, if I were a current shareholder, I'd even prefer not to keep a reserve. But as a prospective buyer a low reserve seems like a risk that would need to be priced in.

"there are buildings that choose to run without reserves because they fear if they have it, they'll spend it. There's nothing wrong with that as long as you know what you're getting in to."

This is reckless advice for the typical middle-class purchaser of a homestead apartment, which is the audience I assume we're talking with here. Any co-op board that cannot stop itself from spending every dollar it gets is not a board I want to have anything whatsoever to do with.

Rich people can operate by different rules. I'm defining a rich person here as someone who could lose her or his entire investment in an apartment or a property and basically shrug it off as one of life's little lessons.

If that's not you, then in my opinion you have NO business buying into a building with zero reserves and/or an out-of-control board.

Plus, it's so unnecessary in this market!

An apartment purchase is an investment that carries with it various and real risks. The idea is to manage as many risks as you can, and to evaluate the risks of each purchase situation with a clear head. That's what successful real estate investors, not real estate gamblers, do.

Reserves are one way of managing risk, and an extremely well-established, very common, and prudent way of doing so. In many buildings the "flip tax" goes into the reserve fund. How much fund there should be depends on many factors, especially the size of the building.

I don't think you can "price in" a low reserve or a zero reserve because I don't think there is a price that will manage this risk for you. You're not going to save that difference for a rainy day, you're going to spend it on something else.

If you got hit with an assessment of $100,000 for foundation work, to be paid to the board within one year, as happened to a friend of mine (albeit this is a multi-million dollar property with few owners), could you handle that? How much assessment could you handle in your price range? Again the building size is very, very key.

But, Post87, I trust you are intelligent enough to realize you shouldn't get your info from a bunch of anonymous people posting here...get yourself some professional advice from someone you know and trust.

{Manhattan real estate agent. Owner of seven properties.}

Does anyone have opinion about mortgage debt for co ops? is it common or rare? Also, is a reserve equal to four months expense before depreciation or four times average annual capital improvements adequate with mortgage debt?

The real estate ads, list deductabiity of coop common charges, should be possible to come up with a rough proxy..

bmc443, my understanding is that nearly all co-ops have underlying mortgages, except for those that land-lease. These mortgages are purposefully not paid off so that the coop retains some tax benefits. They are often interest-only balloon mortgages which have to be refinanced before the large interest rates kick in. I think that all Condos own the land they are built on, not sure if condos can have land leases.

I believe all of this information I am repeating back to you is correct.

Thank you MM110. That is what I was looking for.