When to Not Maximize Reserve Interest?
We have a client with four elevators, which they've been nursing along for the last 25 years. Over the last three years we've been recommending they replace their hallway carpeting and modernize their elevators, both large expenses. They replaced the carpeting in the elevator lobby areas, but have otherwise been delaying the carpeting and elevator modernization projects.
In our last Reserve Study update, we were impressed with the amount of interest their Reserve Fund was earning. They were proud to tell me they maximized their interest by committing it to long-term investment vehicles (they tied it up for 5 years). Generally, maximized interest is a good thing. But not in this case.
Their Reserve Study anticipates $600,000 of expenses in the initial year. Even so, they tied up their entire $800,000 for five years. That's risky. And they just got caught.
The treasurer called, apologizing for "blowing us off" these last three years, because a prospective buyer of his neighbor's unit backed out of the deal "because of the lousy hallways", and in the last week two of the four elevators have gone down for expensive maintenance. The elevator service company says it will be cheaper to do a full modernization than repair the existing elevators.
So he is seeing that our recommendations of the last three years have are not all been crystal ball ideals, they are "real world" needs of the building. He is also now confronted with facing penalties for early withdrawl of the Reserve Funds they will need to do these two projects. Rather than being clever by earning a high interest rate, they're actually going to be losing a bit of money.
Moral of the story - before you lock up your Reserve $ in a long-term investment vehicle to maximize your Reserve interest earnings, look at your Reserve Study. Don't commit Reserve $ to savings that you need to spend! It may mean slightly less interest, but it also may save you some early withdrawl penalties.