Reserve Project overbudget - how to fund overage?

We are a 44-unit townhouse condo association located in VA that is 25 years old and in the process of having our Engineering Consultant issue a RFP for community roof replacement for the Spring of 2020. Our 2016 Reserve Study has a budget of about $170K for roof replacement, but it is estimated the project costs will be about $200K to $250K - so an overage of $30K to $80K.

Current Replacement Reserve balance is $383K and Operating Reserve is $44K. Also, we have Retained Earnings of $48K with total Association annual assessment of $195K.

As Treasurer, I informed the Board at our 2020 Budget meeting, that we could likely cover an overage up to $30K from funds by increasing the 2020 condo fee and up to $20K from Operating Reserves. However, if the overage is above $30K, we would likely require a special assessment. Well to say the least, I got no support for a special assessment and one Board member said we can charge the entire project to the Replacement Reserve since there were sufficient funds in the account. He does not seem to be concerned that this would create a shortage of funds for other replacement reserve projects in the future.

I am no financial expert but my initial blush is pay the new roof cost $250K ot of the Replacement Reserve thus leaving the Replacement Reserve at $133K plus your Operating Reserve of $44K leaves you with an overall Reserve of $177K. After all, something like replacing the roof is what a Reserve Fund is for.

Another general comment: when we did our last reserve study, we asked that the data also be put into a spreadsheet. This made it very easy to see if spending down the reserves in one year would cause problems or if income and reduced spending in subsequent years would allow us to recover enough to meet the next wave. Also allows us to do what-if analysis.

Hi Joyce,

Oftentimes, the estimate from a Reserve Study will deviate from a "real world" project. From experience, I'm not concerned or surprised that your roofing budget is 15%-30% higher than a study document. Honestly, with your self-admitted experience level, you are DOING GREAT!

Question 1: You can charge Engineering fees to Replacement Reserves...and should.

Question 2: This is very transparent but ultimately unnecessary in a tactical sense

Question 3: There's no requirement to covering roofing solely from Reserves...but you should do it this way.

Question 3b: Ultimately, I'd only shift money away from Operating Reserves into Replacement Reserves IF that even becomes necessary. Don't worry over retained earnings. You may replenish your Replacement Reserve before the next true "need" arises on the property.

Question 4: Fund your roofing project using Replacement Reserves. It's not realistic to overly sub-divide your reserves when they're healthy, creating the impression that you're financially "broke" because one project doesn't meet price expectation. Managing Replacement Reserve project blends having that strong financial account + proper timing to execute the projects you need completed.

So....I would pay the roofing cost using 100% Reserve funds and not entertain a special assessment. This would include the engineering consulting fees. I would wait until the end of the current budget year and then have the board determine whether Operating Reserve money should be transferred into the Replacement Reserve. As long as this job even stays at $250,000 - and you carefully manage that engineering firm so you're not overpaying for inefficient service - you are fine in my "take with a grain of salt" and unofficial opinion.

In 12 years of Capital Projects, it is not unreasonable to have cost overruns at percentages you report for your roofing work. It's just disappointing to think you know a good number and real world vendors report otherwise after multiple bids.

Hello Kelly and Others,

Thank all of you for your comments - extremely helpful. Great to know that it not unusual for communities to experience significant overages in the reserve study estimates for major projects and that such overages can be funded out of the Replacement Reserve. Accordingly, any deficits in the fund balance will eventually be considered when the Reserve Study is updated every 5 years and an increased amount computed for the recommended annual contribution to the Replacement Reserve account. Actually, our Reserve Study is scheduled to be updated this year - so will be good timing.

As previously stated, I have no HOA accounting expertise except what knowledge I have gained as Board Treasurer for the last four years. However, I was a Federal auditor for 30 years and a CPA, so have a sound knowledge of financial management and accounting. Honestly, I am quite surprised at the number of duplicate or improper payments made by our Management Company as well as the lack of any processes to ensure the most cost effective contracts and insurance policies for the Association. I monitor payments monthly as well as request a year end report of all payments made by cost category to more easily identify duplicate payments. When I first became Treasurer, I reviewed all the Association's insurance policies for reasonableness of coverage and costs. Ensured the 8 flood policies were consistent in $$ coverage and increased the deductible from a $500 to $5000 per building which lowered the premium by several hundred dollars. The former President and I worked on clarifying an ambiguity in the insurance provisions of our Governing Documents which resulted in a 40% reduction in the Association's Master Property insurance policy. So it is amazing what savings can be accomplished if Board members are active, but then of course we are both retired and had the time.

After four years on the Board, I am truly applauded at what little the Management Company does. They just pay the invoices and made no effort whatsoever to ensure that the billed work was even properly completed. With regard to issuing RFPs, there is no effort made whatsoever in providing any specifications or details in the Scope of Work - which is why we are engaging an Engineering Consultant to develop the RFP and monitor to ensure quality work compliant with the technical specifications. We are a water front community on the Chesapeake Bay and need the most sound roofing system possible to withstand the frequent high winds.

With only 44 homes, it is difficult to get 5 owners to volunteer to serve on the Board especially when many owners only use their homes on a seasonal basis. Our current President likes to defer to our Management Company to handle all matters regardless of how poorly things are done or not done. We paid an electrical contractor a down payment of $12K in March 2019 for a community light replacement project and very little work has been completed to date. The Management Company has been ineffective over the past 9 months in getting the contractor to perform, but the President still believes that we should allow them to handle it. Guess it does not bother the President that the Association is the one sustaining the loss. Time for me to step down when I do not agree with how Association business is being currently managed.

Joyce

Following up on the Management Company issues, a PM can provide a wide range of services from simple bookkeeping only up to full service management of the property. If your PM isn't doing something, it may be because their contract didn't require it, or they're not being kept up to snuff by the board, or they're incompetent. Any PM should understand that their continuing contract depends on their performing as required, and it's the board's job to convey this message.

And some PMs just need more hand-holding and oversight, unfortunately, which you may or may not want to provide. A former manager of my community once said, in relation to one of our contractors, "If I have to babysit you, you don't work for me." May be a good rule of thumb to apply to managers as well.

Yep - we pay about $800 per month to our PM. Wow, do managers really only make $36K-$48K a year - that is low pay and explains why they are essentially just administrative staff pushing paper with little knowledge of sound contracting processes and absolutely no engineering knowledge. You are correct that if the manager were making $150K annually, we should expect more. Being such a small HOA - our choices are limited.

As I mentioned before, our community is on the bay front - so we have learned that we need to request the use of stainless steel deformed/barbed nails for reinstalling any siding and roofing shingles that blow off. How many times can you tell the PM to specifically include this requirement in all relevant repair request and they never remember to do so. It is absolutely no fun to have to babysit the PM, but if needed, the Board either does it or it is the Association that suffers the adverse consequences. Which is what our current President is doing - leaving it totally up to the PM. After a month after requesting our PM to obtain an invoice from a contractor for extensive repair work completed this fall before the books are closed at year end, I finally called the contractor myself and got the $7k invoice issued the next day. Really, why go thru the PM, if it only takes a minute yourself to do it??