First Reserve Study Reaction - $&%(@(!$

Started by ChrisP5 • 12 replies • 1661 views

💬 Join us to post & get advice from 50,000 HOA & Condo leaders.

⚡ Takes 30 seconds

Already a member? Log in

ChrisP5 (Missouri)
Posts: 165

Posted:

Have any of you been in the position of having had the first reserve study conducted while you are on the board? If so what were your thoughts when you got the results and any suggestions for how to break the information to the members of the board/association in the gentlest way possible?

We received our first ever reserve study for our condo association recently and the PM probably thought I was having a stroke when I opened the report in her office. We are not very old but have woefully underfunded reserves so our recommended financing includes reserve increases of

Year 1 - 100% increase
Year 2 - 50% increase
Year 3 - 33% increase
year 4 - 25% increase
year 5 - 20% increase
years 6 - 30 - 3.5% increase

These increases in years 1-5 will be a greater than 10% increase in dues to per year just to cover the reserve funding let alone any operating increases (oh BTW we haven't increased dues in 3 years so the budget doesn't really even begin to cover all operating costs).

The practical side of me knows I did the right thing by pushing for a reserve study when I got on the board earlier this year but the realistic side of me wonders how to even begin to explain this math to the board let alone the entire membership. I understand that we now have a fiduciary responsibility to follow through with funding the reserves at the levels suggested by the professionals.

Any suggestions on how to share this news with a decidedly non-financial board and a membership that will likely revolt? Also any good suggestions on where to buy body armor?

SusanW1 (Michigan)
Posts: 5,202

Posted:

Prioritize the reserve project items. What items must get funding - ASAP?

You will have a homeowner revolt if you submit those kinds of figures in this economy.

RickW (Illinois)
Posts: 169

Posted:

Hi Chris,

The Association I'm involved in is about 10 years old. It was my first year of being a board member when we did our first reserve studay as well and now, 3 years later we just had it updated.

We also had severly underfunded our reserves, although not to your extent. The following 2 years we increased assessments to a point just under what was necessary for a vote by all homeowners. Although, we can raise assessment up to 15% without community approval so we have more leeway. Each year, the budget passed.

However, while I was having a near stroke when I realized the reserves were underfunded, someone from our management company spoke up. He thought the association should take the Reserve Study with a grain of salt, use it as a guideline. The second reserve study will be accurate, it will contain more history or the association.

This past year our board decided to contribute about 5% less to the reserve fund than the study suggested. We did that beacuse of the economy and knowing many are suffering financially. Its better to collect lower assessments than to put owners into a financial situation they cannot afford. We realize we might have a 'coming to Jesus' the next few years to catch up. It still seemed to be the right thing to do.

I guess what I'm trying to say, each situation, each association is different.

Don't have a stroke over it, figure out the best scenario for your association, one that will work towards proper funding yet will continue to keep your complex viable when it comes to resale and property values.

ChrisP5 (Missouri)
Posts: 165

Posted:

How do you begin to go about prioritizing these items? There are only a couple of items on the list that I can see could be reduced or eliminated from the budget. The main costs come from replacing huge amounts of shingles all at the same time and this probably can't be stretched because they are using a 20 year life span on asphalt shingles in the midwest. Other big ticket items include vinyl siding (using a nearly 40 year life span) and concrete work.

The reason leading to the major run ups in the next 5 years is to make sure there is enough money to replace the roofs in 15 years. Between roofs and gutters we are looking at an outlay of >$1.5M in the period of 1-2 years. I have played with a number of models in excel and short of a spcial assessment there really isn't a way to pay for the roofs when they need replaced according to the schedule.

Rick when you had your study updated at year 3 did you find many differences in the report? Overall I would think things may just be identified as needing to be replaced sooner rather than later.

BTW my second thought after nearly losing it was - where is my realtor

TimB4 (Tennessee)
Posts: 21,059

Posted:

Chris,

Don't forget to look for other cost savings. It's easier to sell an increase to the membership when you can say we have done xyz to cut expenses. Some of the things we did:

1. Had volunteers paint the curbs/stripping Savings $2,000
2. Actually got bids for our service contractor Savings: $10,000 per year
(it should have been done in the past but wasn't).
3. redesigned our coupon book to a smaller size Savings $100
(not much but every little bit helps)
4. Went to the membership asking for volunteers before having to hire a management company which would cause increase in assessments Savings: $$$$$
(even if we have to do this every year, it's worth it).

Tim

GlenL (Ohio)
Posts: 5,491

Posted:

Chris what kind of money are we talking about here? 100% sounds like a lot but if you are only putting $10.00 a month per unit 100% is only $10.00. We are a complex of 132 units and we put $40.22 per unit towards reserves or about 23% of the budget.

Ohio changed the law in 2004 and requires each Association to put at least 10% of the budget into reserves and to fully fund them. Otherwise the H/O's have to vote each year to allow for the possibility of a special assessment.

5311.081 Powers and duties of board of directors.

(A) Unless otherwise provided in the declaration or bylaws, the unit owners association, through the board of directors, shall do both of the following:

(1) Adopt and amend budgets for revenues, expenditures, and reserves in an amount adequate to repair and replace major capital items in the normal course of operations without the necessity of special assessments, provided that the amount set aside annually for reserves shall not be less than ten per cent of the budget for that year unless the reserve requirement is waived annually by the unit owners exercising not less than a majority of the voting power of the unit owners association;

(2) Collect assessments for common expenses from unit owners.

Studies show that 5 out of 4 people have problems with fractions

GeraldT4
Posts: 1,022

Posted:

ChrisP5 - What needs to increase is the existing transfers to the reserve fund each month. If you can trim current budget expenditures, the % increases can be offset. Rather than increase 100% Year 1 with a de-escalation to Year 5, why not a constant 50% increase over 5 years?

How old is your association? What was the original date of construction for the 1st buildings, when was the last building constructed?

What you should have in the reserve study is a cost of replacement of the elements and an expected useful life-span.

The job of the board is to create a budget that will cover the maintenance/repair, and replacement of the elements. Provide the community tables of information so they can see the contributing factors. Be candid and seek community input.

ChrisP5 (Missouri)
Posts: 165

Posted:

Tim - Thats a great idea about offering how we have looked for ways to reduce expenses. It might be a good way to help get some volunteers for projects as well.

Glen - Actually I just broke the math down and we are talking about $10.00 per month per unit or about 13% of our current dues. The reserve schedule then runs the contributions up to

2011 - $20/mo
2012 - $30/mo
2013 - $40/mo
2014 - $50/mo
2015 - $60/mo

Gerald - We haven't raised our dues in 3 years and to do that we have pretty much cut back on a lot of stuff to the point the board was cutting back on the amount they were contributing to the reserves to keep dues the same each year. The rapid rise in reserves will be the same $ amount for the first 5 years the percentage just drops because the amount contributed the year before was higher.

Our first building was built in 1997 and the last in 2004. We have 27 building and 13 buildings of garages in our development. All of the roofs were replaced approximately 5 years ago due to severe weather otherwise our first roofs would be coming up for replacement in 6-7 years. The downside to that is now they will all need to be replaced at virtually the same time. Our reserve study estimates that we have approximately 300,000 square feet of roof to replace at approximately the same time.

SheliaH (Indiana)
Posts: 6,964

Posted:

Can't add much to what's already been said. Our last reserve study was done in 2003 - I'm treasurer of our association and wanted a new one done this year, but because of delinquencies, it was voted down (my colleagues say they'll look at an update for 2011 and I intend to hold them to it.)

You could use the prospect of special assessments to sell your case for volunteers and fee increases. After prioritizing what needs to be done first, it may be helpful to get an estimate of replacement costs in today's money and then factor in inflation five or 10 years from now. Explain to the homeowners how much more they'd pay in a special assessment vs. dealing with a small fee increase for the next five years that might enable you to find the replacement without it.

You might also have the reserve study specialist attend a special meeting and explain (in plain English and with a Power Point presentation) how they came up with the figures - your homeowners may not believe you, but may change their tune when they hear an expert break things down.

And then there's the resale factor - with banks and mortgage companies taking a longer and harder look at HOA finances before underwriting loans, they may be more inclined to approve a loan to buy a home in your community because the board is taking the right steps to manage Association financies.

If it is not right do not do it; if it is not true do not say it. Marcus Aurelius

SteveM9 (Massachusetts)
Posts: 3,699

Posted:

Quote:

All of the roofs were replaced approximately 5 years ago due to severe weather otherwise our first roofs would be coming up for replacement in 6-7 years.

Your insurance wouldn't cover the damage to the roofs from the storms? Or did you not put in a claim? Typically roofs last 20+ years not 5.

MaryA1 (Arizona)
Posts: 7,043

Posted:

Steve,

Just because the reserve "recommends" a certain % increase each year doesn't mean the BOD must do this. You can only do what your gov docs and/or state law allow, as far as increasing assessments go. In AZ there is a 20% cap on assessment increases. Check out your gov docs and state law to find out exactly how much you can raise the assessments each year. Also try to guage what you think the members can handle. Are there a lot of sr citizens on fixed incomes in your HOA? Are their alot of delinquencies because of job losses, etc? Raising the assessment an excessive amount (more than 20-30%)could pose a real problem on many of the members resulting in even more delinquencies.

Let the members know exactly what the reserve study recommends but also let them know that doesn't necessarily mean the board will raise the assessments at those levels. Also explain the fact that assessments haven't been raised for 3 years which has placed a drain on the finances. This alone makes it necessary to raise assessments to meet operating expenses. And because the reserves are so woefully underfunded the monthly contribution also needs to be increased. So, instead of asking for a special assessment to meet these requirements, the board has decided to raise the assessments XXX% this year. IMO, the board's main concern has to be meeting the operating expenses, second comes increasing the reserve funding.

RogerB (Colorado)
Posts: 5,067

Posted:

Chris, I just completed a reserve study for a townhome association where all exterior maintence is done by the HOA. They will need to place 35% of their assessment into the reserve fund each year and increase their assessment for each of the next 20 years by 4.5% based on a 3.5% inflation rate.

Condos, townhomes, and single family homes with several amenities require much more than 13%/year going into reserves. Not having an up to date reserve study and by not increasing your assessment in 3 years has placed your association in a difficult situation. Often a Declation limits the percentage that the Board can increase the annual assessment and it can be very difficult to get the homeowners to approve a greater increase. Special assessments may be required unless good planning and major changes in both income and expenses occur immediately.

RogerB (Colorado)
Posts: 5,067

Posted:

Quote:

Posted By ChrisP5 on 05/17/2010 8:04 PM
Have any of you been in the position of having had the first reserve study conducted while you are on the board? If so what were your thoughts when you got the results and any suggestions for how to break the information to the members of the board/association in the gentlest way possible?

We received our first ever reserve study for our condo association recently and the PM probably thought I was having a stroke when I opened the report in her office. We are not very old but have woefully underfunded reserves so our recommended financing includes reserve increases of

Year 1 - 100% increase
Year 2 - 50% increase
Year 3 - 33% increase
year 4 - 25% increase
year 5 - 20% increase
years 6 - 30 - 3.5% increase

These increases in years 1-5 will be a greater than 10% increase in dues to per year just to cover the reserve funding let alone any operating increases (oh BTW we haven't increased dues in 3 years so the budget doesn't really even begin to cover all operating costs).

The practical side of me knows I did the right thing by pushing for a reserve study when I got on the board earlier this year but the realistic side of me wonders how to even begin to explain this math to the board let alone the entire membership. I understand that we now have a fiduciary responsibility to follow through with funding the reserves at the levels suggested by the professionals.

Any suggestions on how to share this news with a decidedly non-financial board and a membership that will likely revolt? Also any good suggestions on where to buy body armor?

Answers to your specific questions are:
1. Yes, I've been in the position of having had the first reserve study conducted while on a board.
2. My first thought was to validate the study by independent checking. Then after adjustments explain to the Board members the effects of inflation on costs. For example at 4% inflation costs double in 17 years.
3. I would not share those increase with the rest of the Board because they can not realistically be achieved. What I would do is try to determine a realistic plan of action to achieve financing over a long period of time. This would include the maximum incremental increase in annual assessment the Board is allowed to make each year; where to cut expenses; and investigate the potential of a loan in the future if required to finance a major reserve expenditure- such as the roofs.
4. No ideas on where to buy the body armor. But if you don't panic; or ask for an immediate major increase in assessment; and present the long range reserve plan as a reasonable "pay as you go" philosophy, the body armor hopefully won't be needed

🎯 You've read this entire discussion

Join the conversation with 50,000 HOA & Condo Leaders:

✓ Ask follow-up questions
✓ Share your experience
✓ Get expert advice
✓ Access 350,000 discussions

Create Free Account →

⚡ Takes 30 seconds

Already a member? Log in here