With construction costs rising and a dense framework of municipal mandates to navigate, the fiduciary duty of co-op and condo boards has evolved over the last few decades from general oversight to a complex exercise in long-term financial planning. To comply with the City’s complex array of Local Laws around everything from structural safety to carbon emissions, today’s boards must take a more disciplined approach to fund and safeguard their reserves. 

And there’s the rub; while the governing documents of virtually all multifamily communities mandate the establishment and management of reserve funds to pay for major maintenance projects and protect the safety of residents, few governing authorities at any level have meaningful oversight or enforcement power over how associations actually manage those funds. Ensuring that there’s enough money in the till to carry out immediate and future capital projects is entirely up to boards themselves.

Not Just a ‘Rainy Day’ Fund

Mark Hakim, a partner at Schwartz Sladkus Reich Greenberg Atlas LLP in Manhattan, explains that "A reserve fund is a savings account maintained by cooperative and condominium buildings intended to serve as a cushion for future work and projects. In New York, however, with the general exception of rental buildings being converted to condominium ownership under the Reserve Fund Law, there are no current laws or regulations requiring existing cooperative or condominium buildings to establish or maintain a reserve fund."

Despite this lack of statutory requirement, the physical risks of underfunding are stark. According to Karen Sackstein, a CPA based in Fair Lawn, New Jersey specializing in condominium and cooperative communities, the physical well-being of a property can easily become secondary to short-term financial pressures — keeping carrying costs low, keeping unit owners happy, and avoiding difficult conversations about assessments. Sackstein concurs that "Most associations have a requirement in their governing documents to put away money for reserves, but there are no specific state-level legal requirements that explain how to calculate those reserves or allocate them properly. There aren't any regulations to make sure work is done or not done, and no fines for negligence. No oversight. No fines. No enforcement. Because there's no law."

"When regular maintenance and major capital projects are not completed regularly and when necessary,” she continues, “there can be degradation of the structure and the building can collapse” as happened in the deadly 2021 collapse of Champlain Towers South in Surfside, Florida. That’s why “Associations need to put money aside on an ongoing basis for maintenance, and not use those funds for other things."

The Fiscal Impact of Local Laws

To maintain a robust reserve, boards in New York City must account for several major regulatory requirements that directly impact their capital budgets. As noted elsewhere in this edition, Local Law 11 (LL11), aka the Facade Inspection & Safety Program (FISP), requires buildings over six stories to undergo exterior inspections every five years. If an inspection identifies conditions as Safe With a Repair and Maintenance Program (SWARMP) or Unsafe, the resulting repairs are mandatory, and may need to be carried out immediately. Buildings that have not adequately funded their reserves for these projects often face massive assessments, loans, and even the secondary cost of protracted sidewalk shed rentals, which can drain operating funds while the primary repairs remain stalled due to lack of capital.

Further complicating the financial outlook is Local Law 97(LL97), part of the Climate Mobilization Act. This law sets strict carbon emission limits that become increasingly stringent through 2030 and beyond. Buildings that exceed these limits face significant annual penalties. For many boards, the strategic choice is whether to deploy reserve funds toward major energy retrofits like modernized heating systems or high-efficiency windows, which can mitigate future liability, or risk spending reserves on hefty fines. Similarly, Local Law 152 (LL152) requires periodic gas piping inspections. While the inspection fee is relatively modest, the cost of remediating a discovered leak or bringing a vintage system up to modern code can be exorbitant, and often requires shelling out immediately to restore essential services to residents.

Your Financial Roadmap

Given that the burden of building up and prudently maintaining a community’s reserve fund falls squarely on the board, proactive planning is essential. Safeguarding an association's reserves starts with knowing how much to assess unit owners each year. Many boards try to keep annual assessments flat, or make only very small increases to keep current owners happy—not thinking about the future until a major repair or renovation suddenly can't wait. Deferred maintenance compounds the problem: if common elements aren't properly maintained, the cost to repair or replace them can far exceed what it would have, had the job been done more timely. 

This is precisely why every association needs a forward-looking plan based on current reserves and projected capital needs; a map, in other words. This is where the reserve study comes in.

A reserve study is an in-depth professional assessment of a building’s structure and operating systems to identify any that may be in violation of building codes, showing signs of deterioration, or approaching the end of their useful life and will soon need to be replaced. The report also includes a financial analysis to determine a long-range funding plan for their repair and replacement. Reserve studies are conducted by licensed professional engineers or architects who compile their findings into a formal report for the board or building owner, identifying any conditions requiring immediate or near-term attention, and making recommendations on how those conditions should be remediated. This allows the board or building owner to plan and schedule necessary repair or replacement work—including how to pay for it. 

According to attorney Scott Piekarsky, a partner at Manhattan-based law firm Phillips Nizer, "Reserve studies should be done about every five years—we hire engineers and experts accredited by the Community Associations Institute (CAI) as reserve specialists. There's a philosophy that about 10% of revenue should be put into reserves on a regular basis, but again [like reserve funding minimums themselves], unfortunately there are no strict legal requirements or enforcement arms” mandating regular reserve studies. 

And even associations that do commission professional studies often fail to use them properly. The study is delivered, and the board never looks at it again. Boards should sit down with their engineer or architect and review the completed study, revisit it annually at budget time, and begin strategizing well in advance for projects coming up in the next five years. Beyond boilers and roof membranes, reports should also account for NYC-specific ‘soft’ costs, such as Department of Buildings (DOB) filing fees and the required oversight by Qualified Exterior Wall Inspectors (QEWI), or Qualified Parking Structure Inspectors (QPSI) under Local Law 126. 

According to the pros, studies should be updated every three to five years—though in the current climate of increasing costs, some advocate for updates every two years.

Financial Oversight & Internal Controls

Much like the division between church and state, maintaining a clear separation between your reserve funds and your operating accounts is crucial for the integrity of your reserves. Despite this, many communities still commingle funds in practice— paying reserve expenses out of the operating fund without reimbursing it; depositing special assessments into the operating account and failing to transfer them back; using reserves to cover operating budget shortfalls without repayment. Each of these practices quietly erodes the reserve fund and can create serious problems when capital projects come due.

As with the amount of reserves a building should maintain, there’s not much in the way of laws around how reserves must be administered. Sackstein emphasizes the risks posed by the current "self-policing" environment: "There are no specific state-level legal requirements that explain how to calculate those reserves or allocate them properly,” she says. “There aren't any regulations to make sure work is done or not done, and no fines for negligence. No oversight. No fines. No enforcement. Because there's no law."

This lack of legal framework means that regular audits by an experienced CPA or financial advisor is vital in order for boards and residents alike to have a transparent view of their building’s liabilities. Internal controls are equally vital; requiring dual authorization for reserve expenditures over a certain amount, and ensuring that all expenditures are recorded in meeting minutes helps prevent mismanagement and fraud. Monthly financial packets should be compiled and reviewed to confirm that capital expenditures match board-approved amounts and that all transfers were made correctly.

Investment, Liquidity & Board Engagement

Given the potential for emergency repair orders under FISP, or the immediate remediation costs often associated with gas piping inspections, a board must ensure that a significant portion of its reserve remains accessible. Financial pros often recommend a reserve investment approach that prioritizes safety and liquidity over high-risk yields. 

Whether the goal is to fully fund reserves or to minimize special assessments and borrowing, financial pros stress that a sound reserve investment policy should establish three clear priorities: safety (principal preservation above all), liquidity (funds available when needed), and yield (reserves should earn returns). The policy should also address criteria for selecting investments and procedures for reviewing and monitoring fund performance — and it provides valuable continuity, helping future boards understand the reasoning behind previous investment decisions.

Steven Silberman, CPA, a partner with PBG Financial Services PLLC in Glenville, Illinois, notes that boards are fiduciaries, legally responsible for the financial management of their associations—and that responsibility is not a passive one. "Having an active, forward-looking board making prudent decisions will help safeguard your community's reserve fund assets and ensure a successful, financially healthy association." 

In the years since Surfside, and in light of the legal and financial consequences of noncompliance with NYC’s Local Laws, that lesson has never been more urgent. The alternative—deferred maintenance, underfunded reserves, and an assumption that nothing catastrophic will happen on your board's watch—is a risk no community should be willing to take.