Building a Better Future with Smart Reserve Planning

Do you know why an effective capital reserve plan is crucial for your building's financial health? Learn how one Chelsea condo transformed their approach to multi-million dollar projects in this eye-opening conversation with Sara Gierloff, CFO of MD Squared Property Group. Here she reveals practical steps to track expenses, align investments with project timelines, and properly communicate with unit-owners. You'll gain insights on the pitfalls of relying solely on financing, why the standard "10% rule" for reserves is often inadequate, and how to avoid surprise assessments that frustrate residents. Most importantly, you'll understand how to develop a flexible capital plan that adapts to changing costs — without breaking the bank. Whether facing Local Law 11 repairs or elevator modernization, this episode helps you prepare for your building's future and avoid the dreaded cycle of emergency assessments. Habitat's Emily Myers conducts the interview. 

How To Run Your Building: For Co-ops and Condos

Transcript

[00:00:00] Emily Myers: Welcome to Inside Track, a conversation with New York's leading property managers. I'm Emily Myers with Habitat Magazine, and my guest today is Sarah Gierloff, chief financial Officer at MD Squared Property Group. Creating an effective capital reserve plan ensures a co-op or condo building is prepared when it comes to tackling and paying for repairs and maintenance.

Some reserve plans look 20 or 30 years into the future, but even five year reserve plans can be effective. Sarah, I believe you've been helping a cond-op in Chelsea pull together a reserve plan. What prompted this? 

[00:00:37] Sarah Gierloff: They had a number of large projects going on, such as Local law 11, elevator rehab. And they had to do an assessment in order to be able to fund these projects. So they wanted to be able to track the projects over a certain timeframe. They also wanted to know how to, with their investments, when things came due, what could they keep investing? When would they have to pull the money out so they could align it with the timeframe of the various projects?

So not only do we look at the timeline of the five years, we actually break it down into six quarters. So that we know, to the best of our ability, how much money will be spent in each quarter so that they can align it with their cash flow and their investment strategies. 

[00:01:17] Emily Myers: Can you describe the initial state of the condop's finances and maintenance plans before you started working with them?

[00:01:24] Sarah Gierloff: They were in very good shape. It was just that the Local Law 11 came along and it turned into a huge project, millions and millions of dollars. And then it's a huge condop. They have a lot of other projects. So it was a matter of, how are we going to pay for this?

How much of an assessment do we need? What type of reserves do we currently have? And we need to present it to the owners as well. So obviously it was the right type of thing to do because you wanna be informed, you wanna know where your finances are going to be and you wanna be able to let your unit owners know what's going on in the building.

[00:01:55] Emily Myers: Very often facade repairs turn out to be more expensive than initially expected, what specific steps did you take to assess the building's current and future maintenance needs then? 

[00:02:07] Sarah Gierloff: So it really wasn't so much me. I worked very closely with the general manager, the resident manager and their general manager, having the engineers involved, having different contractors involved, getting the costs in place. And then I really would get copies of contracts, , work with the general manager and the assistant to come up with, okay, now we have all the costs. What year are we going to do 'em in?

How do you see the breakdown? And then on a regular basis, at least once a year, we update to go ahead and make sure that we're still on track with where the costs are actually falling in place, whether or not we really paid out that type of money in the timeframe we were thinking, or if it's gonna go farther in the future.

Like you said, a lot of times Local Law 11 or even other big projects never actually cost what you think. And there's change orders constantly and the timing gets pushed back because of weather or whatever. So that's the plan that we've had, and this has been going on for at least two or three years now.

[00:03:02] Emily Myers: You mentioned the involvement of engineers, contractors, the general manager. Can you walk us through the process of gathering and analyzing data for the reserve plan? Who was specifically involved and what tools did you use? 

[00:03:15] Sarah Gierloff: Like I said, I'm really the one that takes all the data and I put it together in a format that is able to be presented to the board and the unit owners, which basically shows, okay, here's my opening reserves, what kind of cash flow am I having coming in over what period of time, assessments, loans, interest funding, flip taxes.

And then here are the various expenditures. But the general manager and or a project manager, the engineers, they just have to gather by getting bids and different things, specifications. This was a lot more involved in what, what other boards could do that I think would be useful. I've worked in the industry for over 30 years, both in private and in public working for a huge CPA firm, and then also in the last 15 years at different management companies running the accounting departments.

And the one thing I find is they're never really looking at their five year, 10 year capital reserve plan when they do their budget. It's always about, okay, what's my operating budget? What am I gonna increase? But then I find that the shortfall is really in looking at five year capital plans.

New York is not famous for having reserve studies. New Jersey just passed legislation where the governor is requiring structural integrity as well as reserve funding. If New York has not come up with any type of bill like that, it would be probably pretty detrimental to a lot of the co-ops and condos because they don't have those plans , that reserve funding. So a simple thing would be work with your manager. Work with your resident manager. MD squared has a project management group with an engineer that can get quotes and bids. Try to look at what you have over the next five years and say, Hey, wait a minute.

 Where are we gonna get the funds for this? Let's let the unit owners know these projects are coming up and that we're gonna either have to assess or borrow, which at this point in time is probably not the best thing to do. But it's just a really useful tool to be aware of what your costs are gonna be in the near future. 

[00:05:06] Emily Myers: You mentioned the changes in the rules over reserve funds largely prompted by the surfside condo collapse in Florida. 

[00:05:13] Sarah Gierloff: So interestingly, I worked in New Jersey at CPA firm that I mentioned for a number of years, and they always required reserve studies in new construction in the public offering statement.

So I was involved in preparing budgets, because a CPA firm had to do it at the time, not like in New York. So it's just that they really, besides the structural integrity, which you're a hundred percent correct on, which has to do with Florida, they're also really tightening up on their reserves as well and making sure they're truly funded. They're just not having the studies, but they have to have 'em funded and things like that. So it's probably gonna have quite an impact on a lot of the condos and co-ops in New Jersey as well. 

[00:05:49] Emily Myers: In New York, the standard reserve funds available is usually three months or 10%.

But we are talking about reserve plans, which is obviously slightly different. 

[00:05:59] Sarah Gierloff: But see the reserve funds, and that's such a misnomer because, to me, that's working capital. You have to have one or two months just for cash flow purposes. How do I know that a building's, their elevators or all of the carpet needs to be replaced or whatever. A true capital item is only gonna be one or two months of monthly maintenance. That's not a good benchmark. That's just something that's been set up there.

And every building's unique. Not one building has the same type of common elements. Not one building necessarily has taken care of or done the maintenance the same way. You open up a building due to age and you find a lot of other issues. So I always think the one or two months is more for working capital -- unexpected, unforeseen expenditures , and because condos and co-ops basically are paying straight line over a course of 12 months, a lot of times an insurance premium is due and you need the extra money to pay the insurance premium.

So you need that one or two months of working capital. I've been in this business a long time, so when I hear that, it really bothers me based on my knowledge of 30 years in the industry, knowing that's really not a great benchmark. Or the 10% is just the guideline that Fannie Mae uses, right?

But again, how do you know? I mean $40 million for Local Law 11 in some of these buildings, two, 3 million for elevator, modernization, you really need more than that. 

[00:07:14] Emily Myers: So what you're saying is that a 10% reserve fund is in a sense, meaningless when you think of the sort of unique elements of these New York City buildings.

[00:07:26] Sarah Gierloff: I don't wanna say it's meaningless, but you have to really understand if the 10 percent's going to meet your needs. So 10% a year on a hundred thousand dollars maintenance, which hopefully that building doesn't have huge capital. It's $10,000. 50,000-- 50 thousand's not gonna get very far when you have to do a major project in a building.

And then with the inflation over the last few years and everything else, and the cost of labor, everything is so much more expensive than it probably was two or three years ago.

[00:07:53] Emily Myers: So presumably a reserve plan is there to remove any of this uncertainty with how much is in your reserve fund. Can you just perhaps explain some of the common pitfalls that buildings face without having a plan in place and how to avoid them? 

[00:08:11] Sarah Gierloff: And just let me say that the reserve fund helps with the funding with the cash on hand, but it doesn't always mean that it's gonna cover. Because if you think about the pitfalls, you go ahead and you think you're gonna have a project for a million dollars or 2 million, and then you might assess your owners for that, but then you open it up or the time goes on and now you need another couple million.

But that's gonna happen no matter what. Some of the pitfalls also are that right now a lot of buildings in New York City, especially co-ops, relied on financing, right? To cover the reserves. And now if you have to refinance, if that loan has come up, you went from two or 3% interest to, I'm not even sure, probably six or 7%.

So that's a huge increase in your debt service. So that's a huge pitfall. If you're relying on financing, it's great when interest low rates are low, but like currently when the interest rates that have now debt service could double and that's gonna increase regular operating. Or you're gonna have to assess again just to cover the debt service.

And I just think that assessments on an ongoing basis. I did not buy into a condominium in New Jersey that I had been living in because it was small and it was near the beach and there was absolutely no reserves. And I chose not to because I didn't wanna have to deal with assessment after assessment.

And that's what I saw coming as a professional. Some buildings feel okay, we'll pay as we go, they don't mind being assessed. But I would think for the most part, people would rather have their money or at least know, I can pay so much a year and have that avail, towards the capital expenditure instead of having to come up with 10, 15, 20, 30,000, or whatever it is towards the assessment.

[00:09:43] Emily Myers: So the condo in Chelsea, what was the cost of creating a capital reserve 

[00:09:48] Sarah Gierloff: plan? 

Like I said, that was done through me or through an outside professional or through the management company. It was just more on an hourly rate, so it wasn't whatever the number of hours it takes to put into it. Obviously a professional engineer that there are out there can do a reserve study and it's gonna be, probably a lot more in depth and actually recommend funding over a specific period of time to put into your budget.

So probably to keep it updated, probably a couple thousand dollars a year or less, depending on the number of items and the size of the study. 

[00:10:21] Emily Myers: So while comprehensive engineering studies can be costly, working with existing management thresholds to develop a more modest capital plan can be a cost effective alternative. 

[00:10:31] Sarah Gierloff: Right. And again, as long as you're aware that things change constantly. And that you can't control a lot of the assumptions that go into the study or into the five year. It's really just like a budget, right? When you're doing a budget on an annual basis, we're trying to do a budget over a five year basis for capital instead of for operating.

[00:10:49] Emily Myers: So how do you ensure that the reserve plan remains flexible and adaptable to unseen circumstances? 

[00:10:55] Sarah Gierloff: You have to update it on a regular basis, and even in, if you read the legislation and what CPA firms in New Jersey talk about, it's still, once you have a major project done, have it updated. Have it updated on an annual basis.

If you know something's coming up, just stay on top of it and keep updating it and making the changes as needed. 

[00:11:13] Emily Myers: Are there any other takeaways here for boards? 

[00:11:16] Sarah Gierloff: No, I think when you're looking at your operating budget, which is always very important, make sure you're looking at your capital budget too, and just thinking about how you're going to fund projects that are coming up over the next so many years.

And also it's telling the unit owners. And if you present that and you convey it upfront to them, I think they're aware of it. And then whatever your decision is as to how you fund it, there's no surprises. There may be surprises, but at least you've try to get out in front of it.

And I think that's what's important. 

[00:11:43] Emily Myers: Sarah, thank you so much. Sarah Gierloff, chief financial officer at MD Squared Property Group. 

[00:11:49] Sarah Gierloff: Thank you. Thank you for your time today.