Reserves What Would You Do?

Sorry for the long post but would like to know your input on what you would do in the following circumstances regarding reserves.

You’re a former COA Board member in the northeast Tri-state area, and former transition committee member, very knowledgeable of the association. After you voted for the very reputable Engineering firm to perform the reports, you left the Board but joined the transition committee team to offer your insight to assist the association. After you compiled the transition committee's findings in a comprehensive binder and together with the team presented the findings to the Engineering firm, Board, and attorney you left the transition committee to focus energies elsewhere. However you received copies of and reviewed the capital reserve studies, and the transition deficiency reports.

The engineers’ reserve study shows an estimated replacement cost (ERC) of the elements with itemized projections on the life span of each element. You realize the study didn’t account for the replacement of three big-ticket items. Therefore the lifespan of the elements may or may not fall within the 30-year window for commencement in the funding schedule. If the lifespan is less than 30 years, the opportunity to begin reserve funding is being lost each month. You also realize a mathematical mistake in the amount to be set-aside in reserves each year. The Board chose to budget a 5% threshold of the estimated replacement cost each year with a minimum balance in the reserve account at all times. Sounds good and responsible so far, even though the Board can choose a higher threshold or full funding (not recommended by the Engineer). However, for the past two years the Board budgeted and set aside much less than 5%. For example, say the ERC was $1,450,000.00. 5% would be $72,500.00. However, each year the Board budgeted and set aside $54,500.00. The Engineer’s report made the mathematical error in the written report in the first place. The Board members either didn’t catch it, or chose to accept the error. So two years of funding less than 5% of the ERC now results in a $36,000.00 loss. You brought the matter to the attention of management and the Board; they refuse to revisit the study until 2009. At that time the loss in reserve savings will be at least $72,000.00. Additionally, the Engineer’s study shows a matrix of expenses at each year mark. You take the existing reserve balance, add the amount the Board has projected it will set aside each year (54,500.00) and subtract the expenses. You realize that at year 34 (2038) the reserve balance will fall substantially below the minimum reserve balance that the Engineer reported should be. Granted, you won’t reside in the association in 2038. But the point is the mathematical study is flawed from the get go and reserve funding is being based upon those flaws. Now factor that the ERC of $900,00.00 for the COA roofs has been reduced by $500,000.00 to reflect an installation of a second layer of shingles over the original layer rather than removal and replacement of the existing shingles. This was a Board decision; the Engineer’s first study reflected an overall ERC that included the $900,000.00 for full roof replacement.

RogerB - Agree with writing a letter, already did that several times and tried to talk about it in open meetings. However, let me point out we, the original Board did not make a mistake. We contracted the Engineering Firm to provide a reserve study to cover ALL the common elements. The firm missed three and the new Board could have added those elements to the equation and could do so now.

Hi RogerB - Let me add that I was not on the Board or the transition committee when the reports were finalized. I've taken the time to review the reports and offer my position for whatever it was worth. Overall the Engineering firm did a good job but the common sense errors beckon the question of rationale behind them.

Hi Joe:

It might be worthwhile to see if you can get another reserve provider to give a "second opinion," or simply convince the board to get a new study done. In either case, a copy of the association documents should go to the provider, to make sure they know the HOA's maintenance responsibilities.

As to the roof, best practice is to remove existing roof and replace, but the law allows (at least here in Oregon) up to three layers of roofing material. Obviously, it increases the load on the building, which isn't necessarily good (I moved into a home once that had 13 layers of roofing on the south side and 9 on the north side). It sounds as if the current board is looking to economize, a subsequent board could choose to fund for tear off and replacement.

If the current board is underfunding resrves, then it's clear that they either do not understand their fiduciary duty, or are ignoring it. If they persist, then it would be a good time for members to take action.

J. Patrick Moore, CMCA