Capital Improvements - Raising the funds

I have an idea I wanted to bring to my HOA. I thought I would present it here and let you shoot holes in it if indeed it warrants it.

Bare with me I'm detail oriented......

Here is the situation...

My community is about 10 years old.

We have approx 3 miles of roads, sidewalks, drainage ditches, 2 ponds that flank the entrance and about 5 acres of common area.

Roads are still in pretty good shape, though I have been told not to wait for problems as that can significantly increase the cost of repair.

We have a $28k surplus, approx $17k of that has come in the last two years thanks to lack of snow and the fact that last year the BoD failed to hire a lawn maintenance company for 1/2 of last summer and $5k comes from decreased lawyer fees.

We have approx 320 single family homes and another 40 town homes.

We have virtually no amenities (no pool, no rec areas, no indoor facilities).

Our dues raise about 45k a year (just over $120 per lot). Most years we have broken fairly even, though snow and lawyer fees can dig deep into any possible surplus or provide nice leftovers.

Ok now that you have a little background.....

I have investigated the cost of resurfacing our roads, which undoubtedly constitutes about 8/10ths of the capital budget. If I were to under estimate the cost I would say $40k per mile. Conversely if I were to over estimate the cost I would say $80k per mile. I realize there are a LOT of things that go into determining cost, this is why I give a wide gap in estimating costs. Until we have a contractor here to take a look all we, as an association can do is take guesses.
Other large dollar items include sidewalks (only in our town home areas), pond pumps (they have a design life of about 7-10 years and cost $3-5k to replace, we have 2 (ours are on there 12th year).

Concept....

My idea is to determine some way of estimating costs over a 10-20 year period for long term, high dollar capital expenditure and do it in a way that would attempt to make homeowners pay for what they use.

Large 1 time assessments may cover costs but they do little to charge homeowners for what they use. If a homeowner lives in a community for 12 years and sells his home and then a new owner is assessed $500 for capital improvements the next year, is that fair? The first owner paid nothing for the capital assets s/he used and the second owner is suddenly strapped with a large bill for roads s/he hardly used. Bonds are an option that may help solve the one time high cost but it still does little to make people pay for only what they have used, like in the example above.....

The Solution...............

Attempt to project long term costs over 10, 15 or 20 years. While materials my change in price, asphalt, concrete, transportation costs ect. The quantities will for the most part stay the same (yards of concrete/asphalt needed. If someone who is qualified estimate the amounts then getting updated costs for materials should be relitivly easy.

Create a long term capital improvement budget. That budget MUST outline EXACTLY what capital assets it covers (sidewalkes, drainage ditches, roads ect in fancy leagal terms).
Take the total of that budget and divide it over the number of years, then divide by the number of homes. Use this to create a new fee. Capital improvement fee, user fee, long term capital costs fee, whatever you call it. It just needs to fall within your states guild lines to meet applicable laws.

The board of directors can review material costs changes and adjust the fee every 2-5 years. This will help prevent large shortfalls or huge overages.

For example:

If the estimated costs over 15 years is $200,000 for repair (given 3 miles of road and 360 homes). Then the cost per household per year would be an additional $37 per year on top of your yearly dues. If you live in the community for 10 years then you pay $370 in that time. If you live there for two years you pay $74. This system is as fair as I could possibly imagine because homeowners pay exactly what they use in terms of long term costs. Some communities may have these long term costs included in your yearly budgets so for you this article has little bearing, but my community does not and we have done little to offset large one time costs we are surely looking at.

I haven't even discussed the potential for making money in low risk investment options like CD's or money market accounts. I realize that options to use these funds varies by state, but where I live it's possible and could at the end of 15 years, create an additional $20,000 in income. This is 10% of a $200,000 budget over 15 years.
Estimating long term costs also helps communities responsibly create yearly budgets.

More ideas.....

If the goal of the long term budget in my example is $200,0000 and you divide that by 360 homes that comes out to a little more than $13k per year. At each review period (3-5 years) the amount collected should be calculated against any new progections. If the budget falls short, then next years costs can be adjusted accordingly to make up for the short fall by adding $1-4 dollars per year (in my example anyway). If the budget is over than then each homeowner should be entitled to a dividend in the form of a credit on the next statement for dues. This could be used as a way to motivate homeowners to meet community guild lines by saying that any homeowner in default on dues or who who has failed to meet a restriction of the CC&'R's and has pending action against them is not eligible for the dividend. I don't know if this last part is legal, but if it is I think its a great idea.

Example....

$200,000 15 year budget on 360 homes for years 1-3.

Costs are reviewed every 3 years....

Years 1-3 would pay $37.04 per year per lot.

At the end of year 3 the $200,000 figure is revised to $220,000 to cover increased costs with $1,000 earned from investments or $2.78

Years 4-6 would pay $40.74 per year per lot less $2.78 earned thus $37.96

At the end of year 6 the $220,000 is revised to $210,000 and investments earn more than expected

Years 7-9 would pay $38.88 but this year $4,000 extra was earned from investments dropping the dues $11.10 or $27.78 per year per lot.

As the base amount grows the investment income might offset increased costs, helping to hold the annual costs even even in the face of rising costs over 15 years.

ChrisB4 - in addition to a Working Capital Fund, the account your HOA must have is called a Capital Replacement Reserve Fund. Every element the Association is responsible to replace needs should be analyzed by an independent engineering firm. The firm will provide the lifetime of the element and cost to replace it. Inflation, labor, etc will have to be accounted for. The engineer should also analyze the elements for deficiencies, that they are up to local, state, federal code. First inquire with your MC or BOD if such a study was every performed, often they need updating every 3-5 years.

Joe,

When I was on the by-laws committee I suggested exactly what you said in regards to a engineering firm. We had a meeting and members who claimed to have knowledge of engineering convinced the rest of the members that an engineering firm would charge $7,000 or more.

I found out later that we had already had estimates. Knowing that I can just take the quantitative figures and adjust them for increased/decreased material and labor costs.

Again the point to to pass the cost on to homeowners equally over time.

Thanks again....

It's hard enough finding people to volunteer, I agree there should be a certain level of accountability, but when the community manages itself then each member has a certain level of responsibility to oversee the actions of the board.

If we fail in that endeavor, then we are destined to have a management company and can look forward to increased dues, something I would personally hate to see.

Your overall plan looks good. As has been mentioned, it's basically a capital repair and replacement reserve study. There's a lot of articles available on this as well as posts that have been mentioned. Paying over time is the fairest and best way to go.

I would like to throw out a couple of potential pitfalls. The biggest one has to do with the initial determination of what, when and how much. Unless you're a licensed civil engineer or architect, you'll only be guessing at the current condition of the roads, etc., how much longer they will last, and what it will cost to replace them at the appropriate time. If the association relies on the estimates of unlicensed or uncertified volunteers, then you better have huge disclaimers stamped all over it, and you should have a document signed at every home's re-sale that says the new buyer understands that you're just guessing and may face additional assessments to make up any difference. (And yes, I know that the lciensed engineer or architect will also "only be guessing", but their guesses carry weight in court).

Do your estimates, put disclaimers all over it, and then put a few extra dollars aside to bring in qualified people in a few years, to adjust them appropriately. An "expert" is someone who won't get tossed off the witness stand when asked what their qualifications are to make the type of assessment they made. I've been called as an expert witness before, but if you don't have the right initials after your name, you don't get listened to.

Joe

I do a number of talks every year on reserves and I end up telling every board that they should take the same amount of risk that they are paid to take -0-.....I also ask them to imagine themsleves on a witness stand and answering a question about their qualifications to have made the estimates they did and risking the investment of the other owners. With the amount of money you're going to be dealing with, it would be good to have some solid back-up.

JM2 - You stated "Generally, in Oregon we don't consider concrete a reserve item, since it lasts almost forever without particular damage (think of the Coliseum in Rome)."

I don't know about the rest of the country, but in the northeast, concrete is a wear item with a useful life of 30 years at a cost of apprx. $8.50 per sq. foot to replace.

Click on the Community Associations Network link to the right and then on the "Reserves" link. It'll save you hunting all over the internet. The go to www.apra-usa.com for lists of reserve study companies. Most will be able to give you a ballpark estimate.

Joe

ChrisB4 - yes I have first-hand knowledge of reserve studies. your questions can only be definitively answered by a study. roadway condition is determined by two studies, compaction and core testing. my hoa study shows life expectancy on asphalt is 15 years, sealer is 5 years. your community may be facing a crisis situation. you have 4 years to go on repaving 3 miles of roadway, and 3 years to go on sealing if it was done twice in the last 11 years.

if i were to remain for apprx. 5 years, i would absolutely not join the board at this time. i'd head up a committee in charge of making recommendations to the board and community regarding a capital reserve and deficiency study.

if it were me, i hate to say it but i'd sell. a community that is 11 years old that is blind to the need for reserve funds is not a good investment.

that said, your community is unique because it consists of 40 townhouses and 320 single-family homes. the studies should reflect this by segregating the common areas to all owners, from the common areas only to the townhouses. there should be two studies, not one.

for example, if sidewalks exist throughout the townhouse community but are accessible to all owners for their use, the replacement costs need to be divisible by 360. whereas the replacement costs for the townhouse driveways and sidewalks that lead to the townhouse front doors are divisible by 40. your study needs to take into account that the period of time any element was not funded needs to be subtracted from the life-span of the element and funding may need to be more aggressive.

this correction factor may be offset (a bit) by the fact that the elements were built in phases, therefore, not all sidewalks will reach their 30 year lifespan at the same time. you should be very specific with the Transition Engineering firm to instruct that the studies reflect this staggering factor. in order for the study to be all inclusive, there should be two components: A Capital Reserve Replacement Analysis, and a Deficiency Study to ensure the community was built to code.

your calculations for cost per units ($200,000 divided by 15 years divided by 360)is what is called Full Funding Approach. It will flush out the reserve account for that replacement line item at the 15 year mark. Cost of a study of your community could be upwards of $7,500.00 for townhouses and $7,500.00 for the common areas to all. Some communities fund the cost of a study from the reserve fund. I don't have a compelling argument why or why not to do this. however, if your community does not have an existing reserve fund, funding the studies from the fund is not even an option.

Hi Chris:

I've worked with three reserve specialists in the Portland, Oregon area (Regenesis, Schwindt & Co., and Reserve Studies by WSSC). I'm not sure if any of them do reserves in other states. If you contact them, they will tell you. Although I haven't had a reserve study done by Rob Felix, I took a class from him and I belive he would be very good as well.

There are several methods of doing reserve studies; one is called full-funding, where you try to fully fund each component. This method puts the most money into the bank, and virtually insures that you'll never have a special assessment.

One is called by different terms, baseline funding is one term. It basically looks at how much you have to put into reserves each year so that you don't run out of money in your reserves. You and the reserve specialist agree to a basic minimum amount of money to keep in the reserves, and then they figure out how much needs to go in each year (a constant, fixed amount) to reach your goals while never running out of money. It's a bit higher risk of a special assessment (especially if cost for labor or materials takes a big jump the year before you do your project) but it keeps assessments lower. Then, there are some companies that do a combined approach that aims at full funding but allows the balance to drop below full funding; less risk of a special assessment but a larger amount of assessment.

You will need two studies, one for the common areas of the whole community, and another to cover the particular elements for the townhomes. The TH docs should specify the maintenance requirements for the townhomes; the TH owners would be the ones who pay into a special account to handle the TH area maintenance (a separate assessment).

If/when you put out to bid on a reserve study, consider asking for both a price for doing the study, as well as a package of the study plus two yearly off-site updates. Be sure to let them know of your concerns and ask for an engineering analysis of the condition of the asphalt, as described above. You will probably want to include a good analysis of the condition of the siding, paint and roof on the townhomes, as well as any other areas indicated by your documents.

Best of luck!

J. Patrick Moore, CMCA
Compliance Coordinator
Forest Heights Homeowners Association
Portland, Oregon

Check out the new link I just posted under "Wake Up Call for Board Members". It should help you in convincing the rest of the board about the need for reserves and proper funding.

Joe