How to think about reserve funds

Kent, a member named Tim is probably going to come along and post links explaining how to do one's own reserve study. Here's my introduction.

Suppose a HOA's Declaration says its only maintenance and replacement responsibilities are roofs and exterior painting. Suppose also:

Estimated remaining useful life of roofs = 8 years. Estimated cost to replace = $80,000
Estimated remaining useful life of paint job = 8 years. Estimated cost to replace = $20,000.

The goal of reserve funding is to spread the costs of replacing any infrastructure (with a life expectancy when new over one year) over all owners over all time. To do this, best practices says to fund the reserves by $100,000 / 8 years = $12,500 per year. After year 1, if the reserves hold $12,500, then they are 100% funded. After year 2, if the reserves hold $20,000, then they are 80% funded. Guidance on the net says to try always to be between 70% and 100%, so as to avoid having to get a loan or large special assessments that people may not be able to afford easily.

Every year the reserve study should be updated with the latest best estimates of remaining useful life and cost to replace.

Reserve studies are guides and best estimates. Doing them and trying to follow their guidance on saving is better than not doing them and not trying to save using a thoughtful, systematic approach. The above is an introduction and ignores inflation. However reserve studies should incorporate inflation, and you too should incorporate it per the guidance on the net.

I am seeing boards struggling mightily now because of the effects of inflation. Those boards that followed their reserve guidance; updated their reserve studies yearly; and adjusted assessments accordingly are struggling less.

If your governing documents say the association is subject to the Mass Condo Act, then the association is "required to maintain an adequate replacement reserve fund... " https://malegislature.gov/Laws/GeneralLaws/PartII/TitleI/Chapter183A/Section10 . There's a lot of wiggle room in "adequate" of course but a wise Board would use the statute as a defense anytime it is challenged about how it is putting money into reserves for no good reason. Citing the many sources that advise a percent funded value of at least 70% also has value as a metric of how much "adequate" means.

PS, like anything else, you may want to invite three firms to visit you, and check their references. I'm thinking they will visit for free and write up a proposal for your board to review. It might looks something like a full study in year one, and follow up less detailed off-site studies in years 2 & 3. They probably would come to be interviewed by your board as well.

Just make sure they're either certified as reserve specialists or reserve analysts.

A reserve study is simply an analysis of the remaining useful life of the components that the association will have to replace at some point in the future, along with projections of the costs of those repairs/replacements. The results are usually presented as projected annual spending by year for the next 30 years. Since these are projections, the reserve study will also spell out any assumptions that were made (such as inflation rates).

The company that did our last study provided all of the data in a spreadsheet. I added a few columns with information about our reserve accounts so that we could also track the value of those accounts by year. This allowed us to see how long we could tie up portions of the funds in CDs and how much should be in things like money market accounts where there are no penalties for early withdrawal.

Some recommend having a professional reserve study done first before you try to tackle this on your own. This makes sense if you're in a large community or if your board lacks the expertise to evaluate remaining useful life of components. Something else to keep in mind is that the folks evaluating your roofs will need to climb on top of them, which is something you probably don't want volunteers doing - this is another reason to hire licensed and insured professionals, at least for some of the work.

Kent,

Ellen is correct, here is a link to an old thread about reserves:

Subject: Reserve Studies/Funds 101

Many of the earlier links in that thread are broken (it's a 10 year old thread), but the information is good and links later in the thread should be good.
Please don't reactivate the thread (by replying to posts on it).

To answer your specific question, there is no rule of thumb for reserves. Reserve amounts have to be determined by a reserve study which looks at any reserve item, it's expected repairs, life expectancy and repair costs. Some of these things one can determine on their own with assistance from vendors and the internet. Other items, like clubhouses, pools, etc.) should have a specialist look at.

If you need to borrow from the reserves, it should only be done with a plan to pay the funds back. Otherwise, simply do a special assessment.

If you need to consistently borrow from reserves, your budget is not as accurate as it should be in order to properly determine assessment amounts. Deposits to the Reserve fund should be an expense in the budget process.

An existing Reserve study should be evaluated every year and adjusted as necessary.
A new study should be done every 5 years or so to make sure things haven't changed and your properly adjusted for inflation.

If you want some examples, I'm willing to share.

Email me: [email protected]

Hope this helps,

Tim

Yes, at least your first one. Call it a baseline study. If you truly have as few components as you think, your own Board probably can do follow-up years. Do note that that only common area items, and perhaps limited use common areas go into studies; they need to have a useful life of more than one year; they need to be components that won't last longer that the life of the buildings. Usually 30 years is used.

I see your state does not require a reserve study, but requires reserves. CA, contra Tim's info, requires a full study every three years, and an offsite (no visit) study every year, but no minimum amount. So others reading this should learn what their state requires.

I believe it's FHA that requires that reserves be funded 20%, but I may be mistaken here. Apparently, that's considered "adequate." Many of us shudder at that low %. But some might agree that over 50% is "adequate."

Unless you have structural items, you might be able to do the first one yourself.

This is what I did. However, the only major item were private roads and past invoices provided the area size and a quick phone call gave me current prices.

Good addition, ElleN. I learned this several year ago when, on the Board, I became very interested in our three reserve accounts and felt some components were counted wrong and other ascribed to the wrong reserve account. Our HOA was about 12 years old at the time. Working with the Board and the reserves specialist, our Board agreed to many changes in Remaining Useful Life (RUL) and we voted to rec to the specialist to have components removed from the study. We also added a couple.

As twin tower high rises, we have about 100 reserve components in the 3 accounts, so cleaning up the entire thing happened over 3 reserves study cycles. At the beginning of the process, I sent Davis-stirling.com, a CA* HOA law firm that has an invaluable web site--davis-stirling.com--a question about negotiating with the reserve analyst. The reply was that Boards can. MY question still is on their web site to advise Board members.

*Even for non-CA associations, there are many areas of this site that are useful re:, for instance, forming contracts, writing minutes or agendas and much more.

Yes ElleN cites my question. Why did I ask it? I'd asked our full-time onsite PM if I/ the Board could ask the reserve analyst (RA) to make changes to the studies. She told me NO. They're the experts and know what they're doing. I didn't believe our PM so contacted D-S.com. Over time those attorney have added to the original reply, which had assured me I could try to get changes made.

For anyone in any state who wants to learn more about this, go to ElleN's citation.

Meanwhile, how did the mistakes in our original and subsequent annual studies occur?? Some were mischaracterized in the original reserve analyses aspect of the estimated budget sent to the CA Dept. of Real Estate (DRE) to get final approval of our condo project. Next, an eery PM reported some items incorrectly to the original RA. The board hired a different RA firm and further errors were introduced by yet a subsequent PM. And also by a subsequent building engineer, who RAs also rely on for info in complex buildings.

With so many components, no board member noticed that some seemed weird, some seemed in the wrong account, and all relied on "the experts": the PM(s). engineer(s) and RA firms.