Questionable Reserve Study Practices Virginia

Hello,

I have only posted once before. Perhaps someone will be interested in weighing in on the behavior of a treasurer related to financial/reserve study issues.  I would appreciate another person's characterization of the situation.  I finished my term on the board.  We have an aging community of under 70 units with several expensive retaining walls.  What I found is the authoritarian board member, who is treasurer, is incapable of reading and understanding the reserve studies and has not incorporated all the capital components into the long term financial plan for our Association.  I was concerned and started reading the two reserves studies we have and discovered missing components, especially the scheduled replacement of a $150,000 retaining wall due around 2028/9.  There is a monument wall and two sets of cement steps that "looked fine" that have also been omitted from the list of components.  I conveyed this information to the treasurer and the board.  It was very upsetting for the treasurer who later denied we need to replace anything, just repair it (see quote below).
 
There has been much discussion on repairing the long entrance retaining wall and due to its neglect, I believe it is now at the end of its life.  It was built in 1968 and was assigned a lifespan of 60 years by two different specialists.  The treasurer argued for many months against spending money on a required reserve study due this month, claiming it is a waste of money and we can do it ourselves.  I did my best to present accurate information to the board and the community.  He did the reserve study and I couldn't figure out the numbers.  I found he assigned the entrance retaining wall a new lifespan of 40 years (before any repairs) due to be replaced in 2035 (not 2028/9).  In other words, he is planning on patching it up at some point and passing it on to a future board.  The rubber stamp board does not supervise his work.  

The self-generated reserve study did not include a physical examination of the components and I question whether it is a valid study.  The treasurer has no qualifications to conduct one and I feel he has a conflict of interest as treasurer.  Frankly I believe he is incompetent and he is also has a set opinion about what he will find.  Can someone change a lifespan without replacing the component?  If the wall needs immediate replacement isn't it ethical to present that to the community for a decision?  Unfortunately it will reveal inept financial planning as they knew about this wall since 2010 and the board was critical of the study claiming the components were too high.  This was followed by years of false and misleading commentary dismissive of reserve studies in general.  The studies were called everything from "boilerplate" to a "black box analysis."  It is the treasurer's practice to control with multiple false narratives on all association business and his willfulness is remarkable.  To date the two reserve studies have gone unexamined.  We did have a superior treasurer for two previous years who managed to build a solid reserve fund, but she also missed the components. Virginia law does not include a definition of the study.  I know some of my options but would like to know how would you characterize these actions and behavior?  It is ignoring the law, is it not?  

I am sorry this is so long and confusing but thank you for consideration. 
Sarah W.  

Sample of his of view on the subject:
"We should be free to replace and repair capital assets when they actually require replacement or repair using our own judgment supplemented by professional advice.  Replacing the perfectly sound and functional concrete flights of steps at the final turn of  XXX Road and the turn of XXX Way, merely because the Reserves Study said they shouldn’t still be usable, seems foolishly wasteful to me [they have been dropped from the list of components].  Capital asset lifetimes are no more perfectly predictable than our own.  Capital assets that can be repaired and continue to function do not need to be replaced at a much higher cost."  [He also does not want to raise dues.  The last increase was 10 years ago.]

I found this definition of a reserve study;https://www.lawinsider.com/dictionary/reserve-study  Reserve Studies have been required every five years in Virginia since 2002.https://law.lis.virginia.gov/vacode/title55.1/chapter18/section55.1-1826/
§ 55.1-1826. Annual budget; reserves for capital components.
Common Interest Community Board (CICB) Guidelines for Reserve Studies   [The CICB is the regulatory body of HOAs in Virginia.]
http://www.dpor.virginia.gov/uploadedFiles/MainSite/Content/Boards/CIC/CICB_Draft%20Reserve%20Study%20Guidelines%20(public%20comment).pdf
https://www.caionline.org/LearningCenter/credentials/Documents/RS%20Designation%20National%20Reserve%20Study%20Standards.pdf
Reserve Specialist | National Reserve Study Standards / General Information About Reserve Studies

Hi Sarah,

The Treasurer is 100% correct in my opinion from a philosophical perspectiv. The Reserve Study is an estimate of both cost and expected life-cycle of your assets. If a capital asset is fully functioning in contradiction of the Reserve Study, then I'd not recommend replacing the asset until functionality is compromised.

In terms of Reserve Fund assets being listed, it's very difficult for a Reserve Study to truly account for replacing assets that are expected to enjoy lifespans greater than 30 years.

Also, adding 30-40 years of additional "life" to the Reserve Study doesn't mean anything if the wall is really facing physical compromise. Get an engineer out there (not a reserve study company).

Can you adjust the lifespan of an asset when it meets its "end of life" per a Reserve Study?

Absolutely. In my case, our pool plaster was given a reasonable 10-year life span. Our pool professional reports the the plaster, after 11 years, is still fully functional and attractive. Therefore, we mildly readjust the "life" to expect replastering after 13 years. However, under no circumstance do I assume we get another 10 years....it has to be visually managed now that we know we're "end of life."

This is a weird one because I agree with the Treasurer's general philosophy but, if a board director uses subjectivity to avoid true asset replacement to "save money," they're basically embezzling the life out of the capital assets and pushing the expenses onto future residents who will pay for something they haven't used yet.

Based on SarahW4's referencing the Virginia Property Owners Association Act in her first post to this form, this appears to be about a non-condo HOA in Virginia.This raises red flags for me.

Please clarify: Did the Treasurer prepare these two reserve studies? Or did a professional reserve study company prepare them?

I think issues are getting mixed up here. It's entirely possible a reserve component might outlast a prior reserve study's predicted estimated life. However in general, I think nearly all reserve components will eventually require full replacement.

Reserve studies are not an exact science. Yet they do help with planning. A competent Board will understand that reserve studies should be tweaked, and that at least one director should work with the reserve study company to make sure all agree on estimated lives and estimated costs // at the point in time when the reserve study is completed. //
I think you should try to treat whether to replace or repair the long entrance retaining wall as an entirely separate issue. To me, the wall has little to do with how reserve studies are to be done.

If the wall does not pose a safety risk, and the dispute is mostly about appearance and optics yada, it might be quite subjective as to whether the wall requires replacement or can be repaired.

There are very few laypeople in this country that I would trust to be competent in completing a reserve study. I'd have to see what he did, along with any prior, professional reserve studies, to comment intelligently.

In my opinion, the Board or its representative should absolutely be open to discussing with reserve professionals changing the lifespan. It should not be a one-statement exchange. It should be a discussion, with the reserve professionals explaining their position and the board or its rep explaining its position. Chances are that, after both sides are presented, the reserve professionals will make the change that the board wants, though possibly with an asterisk.

Legally, and for good reason, the decision belongs to the Board. In my opinion the board does not have an ethical obligation to take any input whatsoever. To minimize "pushback," the board might want to inform members and invite them to the next board meeting to take input.

On the one hand and in my opinion, this attitude indicates ignorance (and so fear) of spreadsheets, engineering economic studies, and reserve studies, and the fact that reserve study companies very much want to work with boards to get the end-of-life and replacement dollar figures right. The rest should be left to the reserve study company.

On the other hand, in my experience, this attitude is common and based in math illiteracy; laziness; and the fact that directors are volunteers that are often overwhelmed by much else.

I am looking at the Virginia POA Act Section 55.1-1826:

===§ 55.1-1826. Annual budget; reserves for capital comp==
A. Except to the extent provided in the declaration, the board of directors shall, prior to the commencement of the fiscal year, make available to lot owners either (i) the annual budget of the association or (ii) a summary of such annual budget.

B. Except to the extent otherwise provided in the declaration and unless the declaration imposes more stringent requirements, the board of directors shall:

1. Conduct at least once every five years a study to determine the necessity and amount of reserves required to repair, replace, and restore the capital components as defined in § 55.1-1800;

2. Review the results of that study at least annually to determine if reserves are sufficient; and

3. Make any adjustments the board of directors deems necessary to maintain reserves, as appropriate.

C. To the extent that the reserve study conducted in accordance with this section indicates a need to budget for reserves, the association budget shall include:

1. The current estimated replacement cost, estimated remaining life, and estimated useful life of the capital components as defined in § 55.1-1800;

2. As of the beginning of the fiscal year for which the budget is prepared, the current amount of accumulated cash reserves set aside to repair, replace, or restore capital components and the amount of the expected contribution to the reserve fund for that year;

3. A statement describing the procedures used for estimation and accumulation of cash reserves pursuant to this section; and

4. A statement of the amount of reserves recommended in the study and the amount of current cash for replacement reserves.
====
Va POA Act definition of "capital component":
"Capital components" means those items, whether or not a part of the common area, for which the association has the obligation for repair, replacement, or restoration and for which the board of directors determines funding is necessary."

As a matter of law, it appears to me that Va HOA Boards have a lot of control over what goes into the Reserve Study.

This is true.

I would keep in mind that rarely does any capital component need replacement or repair exactly when a reserve study says it should. If this were not so, then only one reserve study would be needed, at the very start of life of the HOA.

The reason conventional wisdom is to have a reserve study every five years or so is because infrastructure use, exposure to the elements, aging et cetera can vary a great deal.

In summary, right now the only thing I really do not like is failing to use a professional reserve study company every five years or so, and working closely with the company to ensure the study reflects what the board feels is reasonable as far as remaining lives and replacement costs of capital components.

Making more general comments here:

* Reserve studies have two main components: estimating remaining useful life of capital assets and estimating future costs of replacement. They are always educated guesses. The first component is a bit more science-y, while the second can appear to be voodoo since it will be based on things outside of anyone's control (future inflation rates, future interest rates, changes to the producer price index, etc.).

* The good professional companies employee engineers who can evaluate structural issues (as with retaining walls) as well as those who can handle the financial projections.

* Can your board do a good-quality study? This will depend on the board's knowledge and skills and the nature of the association's capital assets. In general, the more "stuff" the association is responsible for, the more specialized knowledge is required.

* There can be good reasons to adjust some of the assumptions made in a professional reserve study. "It's dumb to spend the money" is probably mot a good reason.

* In general, associations in many areas are seeing accelerated aging of components due to more frequent extreme weather events. Physical assets can look OK and not be OK at all.

* A couple years ago I would have said we would be in a low inflation, low interest rate environment for the foreseeable future. Today, we're seeing significant increases in construction costs in many parts of the country, but interest rates aren't rising much.

* The two previous points mean that previous estimates of remaining useful life are probably too optimistic and cost estimates are almost certainly too low.

"It's tough to make predictions, especially about the future." - Yogi Berra

Some comments on what I think the treasurer is missing:

* "Boilerplate" and "checklist" are not bad things. Using them means that professionals don't have to re-invent the wheel with each new job. They have all of the essential pieces laid out for them, which they can then modify as needed. This saves time (and money) and helps assure they don't miss things. Surgeons and pilots - two professionals who have our lives in their hands - use checklists. That should tell you something.

* Photos and diagrams are very helpful for the more visual learners or those who have trouble absorbing information from pages of text and numbers. They aren't there to pretty up the end product or make it more "impressive" - they're included to aid understanding.

* When I was on the board, I *asked* for spreadsheets. The board can see projected expenses and projected reserve levels by year at a glance. This format is very helpful in determining how long you can tie up your money (in CD ladders, for example) and still be sure to have enough money available to meet needs. It also makes it easy to track actual expenditures and see where things may be getting off track. This item seems particularly odd for someone who is dealing with financial information - they live and breath spreadsheets - you'll have to pry my spreadsheets out of my cold dead hands. Again, professionals use them to aid understanding, not to make things "impressive".

I agree that the OP's treasurer seems to have some mistaken notions about things. Worse, he seems to have bamboozled enough of the other board members to allow his viewpoints to prevail. He may or may not be slipping mentally. If he is, I have no idea how to tackle that one - especially since if he's vaguely aware of it, he may try to hold onto familiar things for dear life and not want to let go of his officer position.

Most, if not all Reserve Study software has boilerplate language. That also holds true for many of the governing documents place on HOA's.

You could take two components of a reserve study, the painting of the pool house and a pool filter. Both have a useful life of 5 years. The pool house would be painted when you feel it needs to be painted, and that could be 3 years of 7 years. A pool filter would be replaced when it dies. That could be 3 years or 10 years.

I happen to maintain reserve studies for clients that have one already in place and have not added any components to the study. Once completed it is between 80 to 150 pages, depending on the number of photos included. Most of the information included is legalese boilerplate language. Then I put a summary together on a spreadsheet for the next ten years which also include investment strategies.

The number of directors who read the Reserve Study from start to finish are the same ones that have read all the governing documents from start to finish. Having the information summarized in a spreadsheet is enormously useful.