Big Discrepancy between Last Year's Reserves Replacement Amount & this Year's

KerryL1 (California)
Posts: 14,550

Posted:

I know there aren't too many here who are really interested in HOA reserves, but maybe I'll get lucky and receive a few replies.

I'm on the Board of a twin tower high rise HOA, which means we have a lot of components listed on our reserves schedules.

Our analyst this year, for our '15 analysis, states that we have about $8,000,000 in reserves components. Last year, the analyst from a different firm said we has $6 mill. in components.

This means that instead of being over 45% funded--though not fabulous-- as we thought, we're only 36% funded. This shock caused our Board to literally panic and vote to raise dues by, on average, 9% per month per our 211 residential units.

We have had three different firms do analyses over the past three years (Don't ask!!) All three used differing methodologies and laid out their results in three different formats. This makes it very difficult to find out why there's such a huge increase. I have found one component valued at $500k that was added and it might be legit, but I'm not sure and need to look into that one further.

My question to all of you is: Do you see big discrepancies year over year on yours reserves lists of components? We, as an HOA, have not added new expensive components in '14.

I'll understand if none or few reply!

TimB4 (Tennessee)
Posts: 21,059

Posted:

Kerry,

Have you asked the company why they said 8 mil vs. the 6 mil done on the previous report?

To me, that would be the first place to ask the question.

DavidW5 (North Carolina)
Posts: 565

Posted:

Kerry,

Are you being careful to distinguish between the value of the items in the replacement inventory from the total replacement costs over the life of the reserve study? Some items in the inventory with relatively short economic lives will be replaced multiple times during the study period.

If all the numbers you are comparing are strictly the one time replacement costs of the items in the inventory and you have not added or deleted any significant items, then there indeed is a question of which number is valid.

We found an engineering firm in 2006 that produced a very thorough reserve study. We have had that same firm prepare two level 2 updates to that study in the intervening years. With each iteration we have become more familiar with the details of their methodology and assumptions. This gives us a high level of comfort with our reserve funding.

LarryB13 (Arizona)
Posts: 4,099

Posted:

Kerry,

I think calculating reserves is more art than science. No two people are going to come up with the same results. The problem is that you are trying to predict the future and, in your case, on a very large scale.

Here is a simple example: I put a new roof on my home two years ago at a cost of $6,000. It should last twenty years before it requires replacing. So how much should I sock away for the new roof that I am likely to need 18 years from now? Before I can answer this, I need to know whether the roof will really last that long and what will the price of a new roof be in 2032? We can argue over the actual life expectancy of the roof plus we can argue over costs for replacement in a future year. It is therefore no wonder that different analysts will arrive at different conclusions because until the roof actually requires replacement and until we actually have a firm price to do the work at that time, all we can do is make educated guesses.

Since there is so much guesswork involved in calculating reserves, I would not sweat the difference in numbers from different analysts. I think your board is on the right path in increasing assessments to bring the reserve funds up a bit as no matter which set of numbers you look at you are under-funded.

RichardP13 (California)
Posts: 1,767

Posted:

Kerry

For my association, I also saw discrepancies in how three different firms calculated the reserve components, so I told our Board I would do the study for them in the future.

As David said, it is more of an art than science. I do all the reserve studies for each of the associations we manage except for one. I find it is more accurate because as the management company, I am able to track the investments as well as the expenditures. I can also tell the Board what will be need to repair/replace and how much money would need to be readily available.

DouglasK1 (Florida)
Posts: 2,046

Posted:

Quote:

Posted By TimB4 on 09/15/2014 1:43 PM
Kerry,

Have you asked the company why they said 8 mil vs. the 6 mil done on the previous report?

To me, that would be the first place to ask the question.

Since they were done by different companies, I can answer that already. Here is the likely answer: "The previous company is incompetent, it's a good thing you hired us this year".

Escaped former treasurer and director of a self managed association.

RichardP13 (California)
Posts: 1,767

Posted:

Quote:

Posted By DouglasK1 on 09/15/2014 3:41 PM

Posted By TimB4 on 09/15/2014 1:43 PM
Kerry,

Have you asked the company why they said 8 mil vs. the 6 mil done on the previous report?

To me, that would be the first place to ask the question.

Since they were done by different companies, I can answer that already. Here is the likely answer: "The previous company is incompetent, it's a good thing you hired us this year".

"I like that answer"

LarryB13 (Arizona)
Posts: 4,099

Posted:

Me, too! I wish there was a "Like" button on these pages.

NpS (Pennsylvania)
Posts: 4,216

Posted:

The thing that surprises me is that the $8M reserve study report didn't explain where the additional $2M in components came from.

I too think you may be mixing apples and oranges. The combined value of your components should not be affected by the method used to determine how much should be contributed.

Sikubali jukumu. Read all posts at your own risk.

DaveD3 (Michigan)
Posts: 796

Posted:

Did the board not give them last year's report to start with? I would fully expect the new report to include an itemized list of every item, the old replacement cost and expected life, and the newly estimated cost and useful life. I would also expect a written description of discrepancies be included. Either the board of the company doing the study is negligent if that didn't happen.

NpS (Pennsylvania)
Posts: 4,216

Posted:

Quote:

Posted By RichardP13 on 09/15/2014 2:54 PM
I do all the reserve studies for each of the associations we manage except for one. I find it is more accurate because as the management company, I am able to track the investments as well as the expenditures. I can also tell the Board what will be need to repair/replace and how much money would need to be readily available.

Richard
I have looked at many HOA software packages and have found none that IMO handles reserves well. We do a lot with spreadsheets, but I don't want to rely on spreadsheets for reserves. All we wind up doing is make adjustments to the balance sheet. Have you found something that integrates reserve budgeting and expenditures into the accounting process?

Sikubali jukumu. Read all posts at your own risk.

RichardP13 (California)
Posts: 1,767

Posted:

Quote:

Posted By NpS on 09/15/2014 5:56 PM

Posted By RichardP13 on 09/15/2014 2:54 PM
I do all the reserve studies for each of the associations we manage except for one. I find it is more accurate because as the management company, I am able to track the investments as well as the expenditures. I can also tell the Board what will be need to repair/replace and how much money would need to be readily available.

Richard
I have looked at many HOA software packages and have found none that IMO handles reserves well. We do a lot with spreadsheets, but I don't want to rely on spreadsheets for reserves. All we wind up doing is make adjustments to the balance sheet. Have you found something that integrates reserve budgeting and expenditures into the accounting process?

There are two parts, one is the accounting software that distribute the component funds correctly and I believe the best is TOP Software. The second is the reserve study software. I use the Craftman Construction Cost manual and I use that along with actual invoices when items are replaced. What reserve study analysts don't take into account is labor. So I built a complex excel spreadsheet incorporating all the required California Civil Code Annual Disclosure forms. My days at Countrywide eventually did pay off.

KerryL1 (California)
Posts: 14,550

Posted:

Thanks to you all. I've been comparing the 3 studies all afternoon and have found a couple of errors in the new one, but not $2 mill. worth!! Just, maybe $100,000 worth.

I may have used the wrong word when I wrote methodology. How about categorizing? Here's one example: The new study says it'll take $187,000 to "refurbish" our two 13 y.o lobbies and their estimated useful life has been reached. This is for furnishings But there's a different category called "Lobbies, Remodel" that'll cost $615,000 in 11 years and includes replacing about 7,500 s.f. of granite floor & walls.

It also includes replacing two granite -topped reception desks that are shot to hell now. These desks & their granite tops used to be in one separate category, which made sense. And it would have made sense to place them in the "refurbish" category as the'll be replaced this year.

Yes, this was a Level 2 and the analyst made a site visit and took pics of most components.

There are many common areas where this analyst has broken the category into two "components," "refurbish" & "remodel." Usually, carpeting is placed in the common area itself, e.g., conference room, refurbish. But sometimes the analyst forgot.

The major addition was "Reseal Windows" on the painted surfaces of our towers & town homes 6 years remaining life & a est. cost of $896-$1,210,000, and includes "caulking joints & window seals."

But the vast majority of our windows are part of window systems aka building envelopes. The analysts calls that one Bldg. Exteriors-Recaulk, remaining life 8 years, $215-$291,000.

And there's more: Bldg. Exteriors-Repaint. 0 years remaining life. But the verbiage, once again includes "caulking Joints & window seals." $300-$400K.

Our full-time onsite PM & bldg. engineer accompanies the analyst and directors do not. I think I'm going to have to see if i can meet with the analyst to find out about these bldg. exterior add-ons & a few other discrepancies. Could be the two earlier firms were incompetent. Or it could be this one is!!

NpS (Pennsylvania)
Posts: 4,216

Posted:

Quote:

Posted By KerryL1 on 09/15/2014 6:43 PM
Thanks to you all. I've been comparing the 3 studies all afternoon and have found a couple of errors in the new one, but not $2 mill. worth!! Just, maybe $100,000 worth.

I may have used the wrong word when I wrote methodology. How about categorizing? Here's one example: The new study says it'll take $187,000 to "refurbish" our two 13 y.o lobbies and their estimated useful life has been reached. This is for furnishings But there's a different category called "Lobbies, Remodel" that'll cost $615,000 in 11 years and includes replacing about 7,500 s.f. of granite floor & walls.

It also includes replacing two granite -topped reception desks that are shot to hell now. These desks & their granite tops used to be in one separate category, which made sense. And it would have made sense to place them in the "refurbish" category as the'll be replaced this year.

Yes, this was a Level 2 and the analyst made a site visit and took pics of most components.

There are many common areas where this analyst has broken the category into two "components," "refurbish" & "remodel." Usually, carpeting is placed in the common area itself, e.g., conference room, refurbish. But sometimes the analyst forgot.

The major addition was "Reseal Windows" on the painted surfaces of our towers & town homes 6 years remaining life & a est. cost of $896-$1,210,000, and includes "caulking joints & window seals."

But the vast majority of our windows are part of window systems aka building envelopes. The analysts calls that one Bldg. Exteriors-Recaulk, remaining life 8 years, $215-$291,000.

And there's more: Bldg. Exteriors-Repaint. 0 years remaining life. But the verbiage, once again includes "caulking Joints & window seals." $300-$400K.

Our full-time onsite PM & bldg. engineer accompanies the analyst and directors do not. I think I'm going to have to see if i can meet with the analyst to find out about these bldg. exterior add-ons & a few other discrepancies. Could be the two earlier firms were incompetent. Or it could be this one is!!

Lot of red flags there. Definitely, the Board needs to take ownership of what is going into the study.

Sikubali jukumu. Read all posts at your own risk.

NpS (Pennsylvania)
Posts: 4,216

Posted:

Quote:

Posted By RichardP13 on 09/15/2014 6:32 PM

Posted By NpS on 09/15/2014 5:56 PM

Posted By RichardP13 on 09/15/2014 2:54 PM
I do all the reserve studies for each of the associations we manage except for one. I find it is more accurate because as the management company, I am able to track the investments as well as the expenditures. I can also tell the Board what will be need to repair/replace and how much money would need to be readily available.

Richard
I have looked at many HOA software packages and have found none that IMO handles reserves well. We do a lot with spreadsheets, but I don't want to rely on spreadsheets for reserves. All we wind up doing is make adjustments to the balance sheet. Have you found something that integrates reserve budgeting and expenditures into the accounting process?

There are two parts, one is the accounting software that distribute the component funds correctly and I believe the best is TOP Software. The second is the reserve study software. I use the Craftman Construction Cost manual and I use that along with actual invoices when items are replaced. What reserve study analysts don't take into account is labor. So I built a complex excel spreadsheet incorporating all the required California Civil Code Annual Disclosure forms. My days at Countrywide eventually did pay off.

Will check into TOPS. But it looks like you are managing the reserve tracking with Excel, which is what I would like to avoid.

Sikubali jukumu. Read all posts at your own risk.

RichardP13 (California)
Posts: 1,767

Posted:

NsP

There is Reserve Study software out there. I just happen to know how to program into excel. Most of the reserve software is filler. There is about 5 hard core pages of information and then you need the photographs along with serial, where applicable.

NpS (Pennsylvania)
Posts: 4,216

Posted:

Quote:

Posted By RichardP13 on 09/15/2014 7:51 PM
NsP

There is Reserve Study software out there. I just happen to know how to program into excel. Most of the reserve software is filler. There is about 5 hard core pages of information and then you need the photographs along with serial, where applicable.

Thanks Richard. Will keep looking.

Sikubali jukumu. Read all posts at your own risk.

TeddieL (Texas)
Posts: 13

Posted:

Have you tried asking for the Reserve Cash Analysis Report for the year in question.

This should start with cash receipts for the reserve acct for the year, deduct all the
withdrawals from the acct during the year, and then the sum of these 2 figures should
match the balance on hand.

The reserve cash analysis report should be part of your yearly acct package.

If this does not work, ask for an itemization of all expenses and revenue into the reserve
account, along with the yearly beginning and ending balances, and you can do the match
yourself.

good luck.

TeddieL (Texas)
Posts: 13

Posted:

Have you tried asking for the Reserve Cash Analysis Report for the year in question.

This should start with cash receipts for the reserve acct for the year, deduct all the
withdrawals from the acct during the year, and then the sum of these 2 figures should
match the balance on hand.

The reserve cash analysis report should be part of your yearly acct package.

If this does not work, ask for an itemization of all expenses and revenue into the reserve
account, along with the yearly beginning and ending balances, and you can do the match
yourself.

good luck.

JC7
Posts: 31

Posted:

Hi Kerry,

As you have already found out having a reserve study done by different companies, analyst can and will yield different results. It's all very subjective. One analyst may think a component is good for 10 years and another analyst may look at the same component on the same day and say it's good for 7 years. The difference is 3 years useful life which makes a big difference on your percentage funded. Anything component added to your reserve list should only be for items that were paid as a Capital Expense. For example a component was bought in 2014. This component was not a replacement so it is not listed on your reserve study. Large components will usually fall under a Capital Expense 2014 and added to your reserve component list in 2015. Of coarse you will have to let your reserve company know about this. You don't need a physical inspection every year (unless your documents state otherwise) I believe a physical inspection is once every 3 years in between you have a yearly update. It's really important every time you use a different company your involved with the beginning number and remaining life. Hope this helps!

KerryL1 (California)
Posts: 14,550

Posted:

Thank you, Teddie and JC7.

We added no capital improvements to explain the $2M discrepancy. The major component, though, that the RS added was about $1M in a component that was not previously in the study.

This component is to replace all of the windows in our towers and street level town homes. We already have been reserving to replace the horizontal caulking in our building envelope or "curtain" systems, which contain 80% of our windows, to the tune of $250,000.