Reserve Study

I feel like our reserve study doesn't not reflect the reality of what we will be facing in our HOA community over the next 10-12 years. I am working with our Reserve Analyst to understand the Reserve Study, and the information and formulas embedded in it. This is probably the first time in the communities 35 year existence that anyone has really paid detailed attention to the study.

I'm feeling like I need to make a shorter, simpler version of the study, say for the next 10-12 years to try and get Board members to understand the importance the study has for any medium term plans we make. In the next 10-12 years we will need to repaint all the outside of the homes, replace the roof underlay and concrete tiles, and replace the gutters and downspouts. We need to understand the income flows over 10-12 years to see what we can afford and when.

Has anyone else done this?

Sue

What ElleN said.

Ultimately the BOARD will be the ones that will be making decisions based on the recommendations of tge study, so its their responsibility to ask as many questions as necessary so they'll understand what's going on.

Assuming you're on the board, I suggest the specialist present his or her findings at a board meeting so the board can ask their questions. It's not about making the numbers look pretty or the specialist convincing anyone what to do. The board has to sign off on the findings and what you do with them after that is on you. You can make adjustments as necessary and the numbers can be recalculated before the final version

After that, have a special homeowners meeting where the specialist can make his/her presentation and homeowners can ask their questions on how the study was done and then tbe board can discuss what it intends to do and how that will affect assessments going forward. If peopke squawk, mention Surfside. Your community may not be as hard up as that community ended up, but caring for the common areas takes money and costs do go up. If they want property values to keep up (whatever that means), they have to be willing to make plans to care for the community.

Chances are these assessment increases in the coming years are in the study to help ensure fully funded reserves, covering short term, medium term and longer term replacements and major maintenance.

I can guarantee you that these increases (in the assessment) are there because this is one of many paths the HOA can take to ensure fully funded reserves.

This assumes the reader knows the meaning of "fully funded reserves." For example, just because the reserves are 100% funded this year does not mean they will still be 100% funded next year.

Do you understand that the board can ask the reserve study company to put in numbers that the board feels are more realistic for (1) estimated remaining useful lives; (2) cost to replace in today's dollars; and (3) assumed inflation rate? As long as the numbers are reasonable enough, the reserve study is going to do what the board asks.

Are you sure the reserve study goes out fifty years? Thirty years is more usual.

The board and you have to understand: Reserve studies are not an exact science. However, having a full-blown study done every five years, with an annual review making small adjustments, is the best path to ensuring the financial health of a HOA and the health of its infrastructure.

Exercise for you:

A condo association's sole maintenance responsibility is the roofs. The roofs are brand new this year. The roofs have a 20 year life expectancy. In today's dollars, replacement costs $100,000. Assume 0% inflation for the next 20 years. The reserve company instructs the HOA to save $5,000 per year. Suppose after ten years (and so, in 2033) the HOA has saved $30,000. What "percent funded" is the reserve account?

If $50k is in the reserve account after ten years, then the reserves are 100% funded at this point in time. I put the latter in italics to make a point to other readers. To review:

For reserve funds, the metric is "percent funded. The definition of "percent funded" is

amount of money actually in reserve account / amount the reserve study says should be in the account at a specified point in time, usually the present

For the problem above, the reserve account is sixty percent funded ( = 60% = $30k / $50k * 100%).

Follow-up question:

Suppose two more years pass (so twelve years total). Suppose the HOA has not added anymore money to the Reserve account, nor has the HOA taken any money out. The reserve study is unchanged. Inflation remains 0%. What "percent funded" is the reserve account now (after 12 years)?

Ooo ooo ooo!

At 12 years, the reserve account should hold $5,000 x 12 = $60,000 in order to be full funded/on track to afford roof replacement without a special assessment. It only holds $30,000. So I say $30,000/$60,000 = 50% funded at this point in time.

In theory this isn't hard to grasp.

Where people have problems is when estimated inflation rates, projected replacement costs, and estimates of remaining useful life change constantly and sometimes without much warning. So that 20 year roof may suddenly become a 15 year roof, which can be a real problem if you're already in year 15 ($5000 per year to be fully funded = $75,000 in reserves in year 15, so $25,000 less than needed to replace roofs ---> special assessment or loan to pay the difference).

I suspect that many people believe that you shouldn't be able to go from fully funded to 50% funded without the board doing something wrong. But in my case it was Mother Nature who probably did it. (I'm excluding insurance from this because it may or may not apply, and because a lot of folks are wary of insurance claims because of spiking premiums.)

Our most recent reserve study is 5 years old and was done before inflation rates ticked up and supply chain issues caused the prices of building materials to spike. Our departed board hasn't budgeted for a new study this year, so next year it needs to happen.

The idea of making the insurance deductible a reserve item is interesting. But I have some of the same concerns that ElleN has:

* insurance is clearly an operational expense.

* it's not predictable except in a general sense of "it's going to cost more" since it's less tied to inflation and more tied to things like weather events.

* how do you estimate remaining useful life for something like this?

In other words, it fails the normal test of for reserve items.

On the other hand, insurance claims often go toward repairs of the common elements, a lot of which *are* reserve items, so you can make a good argument for considering it reserve item.

On the third hand, my community has all-included insurance, meaning that some of the repairs will cover items that are defined as part of an individual unit, so *not* reserve items.

Insurance is the most essential of essential expenses, particularly in condos where so much of the property is common elements. If state laws make it impossible for an association to accumulate funds to pay for something like this in any other way, what else is the board supposed to do?

I think I've mentioned in the past that we have a "snow reserve" account. We budget for an average winter, keeping in mind that our winter snow totals can range from a couple inches to a couple feet. This shares some of the same characteristics of insurance deductible expenses - ie, unpredictable, unavoidable through normal prudent management, tied to events that we have no control over.

'Tis a conundrum.

Say, Susan, I'm looking at our reserve study and see plenty of components with a "mid-range" est. remaining useful life. Our previous 3 reserve study providers included that info too. I think I'm not understanding your concern or what it is you're "working with" you analyst on. Your reserves analyst or specialist is certified, right?

The study does recommend how much you should contribute each year so that every component is funded. when It useful like ends or it's time to do repairs. both repairs and replacements estimates should be on your study. If raising your dues as much as the specialist recs would be a hardship for many owners, ask for scenarios that will get you on a path for full--or 70 % funded-- within, say, a few years.

This is maybe the 3rd 4th time you've posted on pretty much this same topic. I think we've advised previously that your Board invite your analyst to present a little work shop to your board and even have it be an open Town Hall for all owners who're interested (if like my HOA, not many showed up for our TH with the analyst recently. It also was on Zoom). Based on what you've written, do not try to do this yourself.

In CA, a full study--including an onsite vist is required every THREE years. And a smaller study every year. I've noticed other states also are adding such requirements. For the annual study, an assoc. person,--a PM, a board member if no PM or perhaps a building info diner will inform the specialist about any changes to reserve components, sot that the socialite can adjust the study.

While such a specialist can and will adjust something in a study, for instance, estimated remaining life of a component or even remove components from a study, they won't give in to exaggerations or lack of evidence about what an item "really"costs to replace. In these cases, the analyst will require a board vote, and will note in the study that the board voted to xxx because xxx. As with any professionals, e.g., assoc. lawyers or CPAs, reserve specialists can and do dump accounts where boards clearly are ignorant with their requests or are merely trying to reduce the overall $ total of items.

Anyway, Susan, perhaps you can reframe your concerns to get replies that'll help.