Reserve Study and Reserve Planning

Our HOA had a reserve study done last year. We are in the midst of pulling together our operational budget and packet to the homeowners.

In doing so, discovered one line item missing in the reserve study and a fairly sizeable cost difference on another line item. The item left out is a near term project that will run approx. $10 - $15k. The item that has a cost difference is related to asphalt which has a longer life and remaining useful life, but represents a $20k difference. At the time the reserve study was done, the guy told us we overpaid for the project so we dug in deeper. Turns out we laid a higher grade asphalt to sustain weight of garbage truck, etc. but as the discovery was after the reserve study was completed, the added cost was not taken into account. We are a small HOA so these are significant expenses for us.

The board has a difference of opinion on how this should be handled. Some are of the opinion to adjust these line items accordingly now -- so the numbers aren't skewed and so that we plan for properly. Others are of the opinion that we wait until the next reserve study is conducted in 2016. The challenge: how do we explain to the homeowners the $10 - $15k that isn't accounted for but is a planned 2015 project (not included in operational budget or reserves)? One board member is of the opinion this is not critical and it would not be ethical to not follow the reserve study. However, this contradicts the draft report prepared to send to the homeowners as there are several variances in comparison to the reserve study. Example: In the reserve study one line item shows the useful life as 45 years with 14 years remaining, whereas the draft report to the homeowners indicates a 20 year useful life with 3 years remaining. There are several others.

Any suggestions or experience with this type of scenario ?

Our reserves analysts have made errors 2 of the last three years. They have corrected them when pointed out to them. I think it's best to make corrections now.

In CA, you need a review of your reserves every year. What level study was done this year (three is the most detailed, one the least)

Btw, how do you intend to pay for the $10-15k project in '15 if you don't budget for it somewhere?

The detailed study was completed last Sept by an independent 3rd party. Should it have been caught then -- yes, but it is what it is.

Best I can tell the BOD hasn't been in the practice of doing an annual review. I elected to do as I couldn't tie to the draft numbers presented and conclusion reached on fees and assessments. That is when I discovered the variances in the draft report and the missing/incorrect line item costs.

And, exactly my question -- if we wait until 2016 to fix, then the project pushes out + we are 2 years in the rears on the line item w/ the incorrect cost.

KerryL -- maybe this explanation helps:

(1)Reserve study analyst omitted a large item in reserve study done last Sept. We had a window to submit changes (come and gone). I'm sure he would be willing to adjust for a fee, but also under tight window to get budget packet sent to homeowners. Since the board is aware of the mistake, and the board has agreed it will be the start of our exterior project planned for in 2015, seems logical to make the correction. Other board position is to wait until 2016 when the next reserve study is done.

(2) The cost of a 2nd line item is understated by $20k. It is a longer term project, but since the board is aware of the mistake, seems we should correct now. Other board member wants to wait until 2016 to adjust.

(3) The reserve study states the useful life and remaining useful life for each line item. We send this summary to the homeowners in the budget package. However, the draft report I received does not correspond to the reserves study. I can understand a -1 year adjustment given the report was done a year ago, but the adjustments are anywhere between 2 - 25 years. I asked for an explanation a number of times (maybe some logic I'm not understanding) but the board member will not respond to this question.

We are a smaller HOA -- 21 units. $10 and $20k projects are big for us.

Np5,

(1) start in Spring of 2015 -- 5-6 months off max, possibly sooner since we enjoy nice weather in CA (2) longer term; several years away so not as problematic but a very obvious understatement on the estimated cost.

Regarding (3) -- RS includes only the RULs as determined by the analyst. Our bookkeeper prepares the homeowners reports and a board member works with the bookkeeper to get them done. I have asked multiple times for an explanation --- in total 3/4 of the line items have changed (e.g. 20 vs. 45 years UL, 3 vs. 14 years RUL, or zeroed out where the RS states there is still RUL). Neither will answer the question except one comment from the board member stating it is not critical at this time. Nor did the board ever discuss or agree to make the changes.

(1) Sounds like this is budgeted to be done next year. So it should be no surprise to the homeowners. When the reserve study update is done next year, the line item can be added.

(2) The cost is $1,000 per household. So if it needs to be done in say 5 years, then the HOA should be accumulating $200 per year from each household. IF there are already sufficient funds set aside, this may not be an issue. I expect that the board members, who know much more about the particulars, have hashed this out. But see my response to (3).

(3) This one is unclear. You appear to be saying that the RS produced a report, but the HOA revised some life expectancies and created their own numbers for distribution to the membership. I'm not sure about CA, but in the states I have lived, it's ok to vary from the RS recommendations. But I cannot understand why those differences would not be explained. And the wide discrepancy after only one year makes the whole process look suspicious.

"Not critical at this time" is a silly statement when you are talking about reserves - The whole purpose of the reserve report is to adequately project future needs. Nothing should be "critical at this time."

Tim84,

Good advise --- thanks.

Yep, we've crossed the path to adjust the RL when certain line items were not maintained properly, weather, etc. The difference being that the board has discussed, agreed and communicated an explanation as to why the changes are needed to the homeowners.

Great advice from Tim. Never forget that HOA boards are volunteers subject to honest miscalculation on Reserve Funds and other items. Plus, property management is a "fluid" activity so it's great you've uncovered hidden expenses and form strategies. Don't lock into a paper document.

In full candor, our HOA board has spotted not one but TWO items that affect our Reserve Funds - a forgotten but expense fence and a stand of trees subject to environmental regulation.....$50,000 in possible impact. We'll adjust, be transparent, and keep saving money.