Thursday July 10, 2025
As a board member, one of your top responsibilities is to maintain and improve the value of your property. This is not always an easy task. It can be difficult to budget for unplanned equipment replacements, repairs to building systems and facilities, or upgrades to building amenity spaces and common areas.By partnering with an experienced property management company that knows how to put effective reserve-funding strategies in place, your board can properly plan for these expenses and minimize the risk of saddling your unit owners or shareholders with unexpected special assessments.
This article is for informational purposes only and does not constitute financial, legal, or tax advice. Condo/co-op boards should consult with their financial advisors, legal counsel, or lending professionals before making any financial decisions.
What are co-op and condo reserves?
Generally, co-op and condo funds designated as reserves are long-term savings set aside to cover major building expenses like roof replacements, elevator upgrades, and facade repairs. Typically, these savings are held in a separate account identified as a “reserve fund,” typically a low-risk, interest-earning account. Unlike operating funds, which pay for routine services such as cleaning or landscaping, reserves are used for capital projects that keep the building safe, functional, and compliant over time.The rules for creating and managing reserves can vary. Your governing documents may determine whether a reserve is required, how it should be funded, and whether owners or shareholders can delay or adjust contributions through a vote.
Cash management advisory services offered by FirstService Financial can enhance the returns on your reserves. Learn more.
What are co-op and condo reserves used for?
Co-op and condo reserves are commonly used for major capital expenditures that are not part of daily operations. Examples include:- Roof replacement
- Elevator modernization
- Facade restoration (including the Facade Inspection Safety Program [FISP])
- Boiler or HVAC system upgrades
- Plumbing and electrical system overhauls
- Lobby or hallway renovations
- Emissions compliance projects
Are condo reserves mandatory in NYC?
There is currently no legal requirement in New York State for condos and co-ops to maintain a minimum reserve fund amount or collect reserves annually within an operating budget. Many attorneys and accountants, however, recommend that boards follow the Fannie Mae minimum requirement for condos. This includes funding replacement reserves for capital expenditures and deferred maintenance equal to at least 10% of the applicable operating income.Remember, every building is different, and Fannie Mae's recommendation may not fit the unique circumstances of your property.
In general, keeping a well-funded reserve is widely recognized as a core part of responsible financial planning. It’s also something lenders and underwriters often look for when financing units in a building.
What is a reserve study?
A reserve study is a detailed evaluation of your building’s major components, designed to help boards plan ahead for large repairs and replacements. It typically includes:- An inventory of major components (roof, facade, mechanical systems, etc.)
- The expected lifespan of each system
- Estimated costs for repair or replacement
- A funding plan based on projected expenses
How much should a co-op or condo have in its reserve fund?
While there isn’t a legal minimum, condos and co-ops that do not have either a 10% reserve line item in an operating budget or a reserve study with a corresponding prescribed reserve line item in an operating budget are technically not compliant with current Fannie Mae and Freddie Mac lending requirements. Most lenders require co-ops or condos to follow Fannie Mae and Freddie Mac’s guidelines for reserves when deciding to provide mortgage financing to owners and purchasers of condominium and cooperative properties, regardless of loan amount.It can be challenging for a board to identify all areas of the building that will eventually become outdated or fall into disrepair and require the support of reserve funds. The optimal percentage may be quantified by performing a comprehensive physical analysis of the current condition of your property’s assets. The study estimates the remaining useful life and identifies future replacement costs by assessing the condition of building mechanical systems, amenities, and common areas to identify which items should be prioritized for replacement or repair. Upon completion, the board should be empowered to make informed budgeting decisions for long-term financial success.
It is important to treat your property assessment as a living, breathing document that should be regularly reviewed and updated. For example, the assessment may indicate that a roof should be replaced in 10 years. If eight years have passed, there is little sign of disrepair, and all recommended preventive maintenance was completed, the board may decide to go another five years before commissioning any work to replace the roof.
Who decides how condo reserves are spent?
Board members typically decide how condo reserves are spent, within the framework of the governing documents. Major expenses usually require formal approval, and some governing documents mandate a vote of the membership for projects above a certain price point. A professional property management company can be an important partner in that process, helping boards identify project priorities, gather bids, coordinate with engineers, and navigate local law compliance.Can residents see how condo reserves are being managed?
Most boards include reserve fund balances in their financial statements and budgets. In both co-ops and condos, transparency around reserves can help establish trust between the board and shareholders/unit owners.What is the difference between maintenance and reserve components?
Maintenance covers recurring tasks like window washing, while reserve components include major building elements like the roof, plumbing, or electrical systems that eventually need full replacement. Some systems, like HVAC units or laundry equipment, require both ongoing maintenance and eventual replacement, making clear categorization especially important for planning and budgeting.Deciding whether these costs should be categorized as maintenance, replacement, or both will ultimately determine if they will be included in your annual operating budget or as part of your reserve fund. Usually, less expensive items are included in the operating budget, and costlier items are assigned as reserve components so their replacement costs can be financed over a longer period.
To protect the lifespan of your building components, boards must budget for maintenance costs every year. If they don’t, the board will not be prepared to pay for repair or replacement costs and may be forced to impose a special assessment or secure a loan.
At FirstService Residential, an increasing number of boards include vital infrastructure components during the budget planning process, especially for buildings that are decades old. These components are typically designed to last a very long time, are generally out of sight, and as a result, are often not top of mind when boards consider potential maintenance costs.
What are the benefits of maintaining a reserve fund?
As your board takes on the responsibility of budgeting for the building, be sure to consider reserve funding, which can make the budgeting process much smoother and help keep your long-term financial plan in check.-
Peace of mind.
A well-managed reserve fund gives the board a clearer view of what’s ahead and helps reduce the stress of unexpected expenses.
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Market value preservation.
Consistently funding your reserves over time is the key to protecting the fiscal health of your property. When reserves exist to support shared assets in a condo or co-op, the market value of the building is better maintained.
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Equitable cost participation.
One of the main advantages of establishing and maintaining a reserve fund is that unit owners and shareholders who are using and enjoying your building’s assets are participating in their costs. Without reserves, a special assessment may be needed, which can cause distress or financial hardship for owners and shareholders.