How a Reserve Study Helps a Community Part 2

If a community’s capital reserves are underfunded, a reserve study provides direction on how to properly restore the reserves to a healthy level.

A good reserve study is an excellent tool when bidding out construction work since it should hopefully include both unit prices and material quantities.

If a community is planning a new project, perhaps an addition to the clubhouse or a new playground a reserve study can include this too. Of course, you can’t expect a reserve professional to provide a quote on future work. There are too many variables, however if a contractor has already provided a quote for the work this can be incorporated into the study.

Now don’t take this as gospel, but my understanding is that if a condo or townhouse community wants to be certified for FHA loans it needs a recent reserve study. What is considered recent? I am not sure. I am guessing not older than 5 years. Maybe somebody else knows.

How a Reserve Study helps a Community Part 1

A reserve study minimizes uncertainty. It does this by providing a timeline for future expenses and establishes if the homeowner’s association has saved enough money AND is still saving enough.

As townhouse or condominium communities get older, they tend to put less into reserves because their annual expenses continue to rise; HOA boards are reluctant to raise dues. The sooner a reserve study is performed the less likely an assessment will be required. Assessments are almost always an unfair solution to current residents. Why should current homeowners shoulder the expense that earlier homeowners should have been saving for? This is a common cause for lawsuits against the homeowners association and current and past board members.

Family friends of ours own a unit in an older condo tower in Florida. Their association just had a reserve study performed. It turns out that they are a million dollars underfunded! That will keep you up at night.

Reserve Study Limitations Part 2

Another significant limitation of a community’s reserve study is the assumptions the reserve study is based on.

How accurate is the predicted inflation rate? We use historical data to determine future inflation. Obviously this is not a perfect method. It’s unlikely that a reserve study from 20 years ago accounted for the effect that China’s growth would have on building material prices. What’s the next 30 years going to look like? How much will oil cost?

When a homeowner’s board member reviews his community’s reserve study, s/he will notice that a reserve study also includes interest on the community’s reserve balance. This interest rate over the course of years has a significant impact on the community’s savings. Is this interest rate reasonable? What is the interest rate of your savings? Perhaps the community should be more conservative and change the reserve study’s assumption.

A reserve study is the most accurate the day it is created and each day afterward it becomes a little less accurate. While a reserve study may project out 30 years, its useful life is maybe 3-5 years.

Reserve Study Limitations Part 1

While a reserve study is an excellent tool for a Homeowner’s Association board, there are a number of limitations associated with reserve studies.

One of the main limitations of a reserve study is the difficulty in predicting the useful and remaining life of an asset. If you informed me that a townhome’s vinyl siding was 5 years old, I’d believe you. If you told me that same siding was 10 years old, I’d also believe you. It’s honestly very difficult to ascertain the age of some assets. As reserve study professionals, we have to make a number of assumptions, some of which are reliable and others which are not. Obviously if a condominium community is 14 years old, it’s almost certain that the roof is 14 years old.

Frequently, it is late in the useful life that building component begins to show wear or deterioration. From that point on deterioration may accelerate. Sometimes, a material’s deterioration actually occurs in the interior, away from the surface. A reserve study is noninvasive, meaning we do not peer behind a condominium’s siding or core samples of your street’s asphalt, and we therefore must speculate to some degree about the extensiveness of unseen damage.

For all these reasons, it is important to get the actual installation dates of your condominium or townhouse’s asset.

Another limitation is associated with a community’s signage or monument. Many assets have an aesthetic component, in which case its useful life is subjective. I could look at a monument sign and say it’s fine, I can still read it, or I might say that it looks old and detracts from the community. Is the asset performing for what it was intended? My wife is from Costa Rica. You drive 1 block and you’ve hit more potholes than you do all year here. Is the asphalt still performing as intended? It depends on your perspective.

Is your Condominium or TownHouse’s Vinyl Melting?

Townhouse's Melted VinylOccasionally I perform a reserve study for an HOA with condominiums or townhouses suffering from melting vinyl. With building lots getting smaller, some single family home communities are also affected by this issue. While vinyl is an excellent product that minimizes maintenance costs, it does have some drawbacks. One potential problem is the potential for melting.

Melting of vinyl siding is typically due to the sun’s reflection from Low-E windows of neighboring condominium or townhome buildings. According to the Vinyl Siding Institute temperatures as low as 160 degrees Fahrenheit can soften normal grades of vinyl siding. Darker colors which absorb more heat are more susceptible. Heat generated from reflected sunlight of double paned Low-E windows can reach 200 degrees Fahrenheit, more than sufficient to melt most grades or colors of vinyl siding.

There are some solutions that may alleviate this phenomenon. Simply installing window screens on the guilty windows may be sufficient. You can also try planting architectural bushes or trees, although this can create other problems including decreased security. Although more expensive you can also replace your condominium’s melted siding with siding with a higher melting point. Some siding contains an additive called Lubrizol, which raises the melting point to 220 degrees.

Other options include contacting the home builder, if the home is still under warranty. Hopefully, the builder will come up with a better solution than replacing your townhouse’s siding with same grade of siding. I have read that some guilty Low-E windows are slightly warped which concentrates the sun’s rays like a magnifying glass. Of course replacing your community’s window sashes is a more expensive route and it is possible that the replacement window suffers from the same condition.

If you do plan to replace your window sashes, investigate your options. Apparently, windows used above elevations of 5,000 feet above sea level use small tubes or capillaries to equalize the pressure so the windows do not warp. The cost is about the same, so this might be an excellent option for your Association.

Fall Protection Considerations for the HOA Board

Grounds 06Whenever I visit a community with retaining walls, inevitably I make a note in the reserve study about fall protection. Retaining walls create abrupt changes in elevation, and even a small fall can cause serious injury.

While many retaining walls lack rails or fencing, frequently a fence has been installed, but simply forgotten over the years. I’ve seen many fences with missing sections or have clearly rotted to the point of uselessness. In my opinion an old, rotten or damaged rail is the most dangerous since it gives a false sense of security. Sometimes shrubs conceal the potential danger.

What to do? Hopefully, your association’s HOA board walks the community at least a couple times a year to review the general condition, and checking the rails, especially wooden ones, can be just another item to check.

Short Video on Reserve Studies

Our Midwest office produce a short video on reserve studies for community associations.  I thought it was pretty good.  Maybe you will too.  Here it is:

http://youtu.be/eosBU1qK7hY

 

Replacing Timber Retaining Walls

Condominium's timber wallTimber walls are slowly becoming less popular and for good reason.  Retaining walls are almost always installed early in grading operations after virgin land is cleared.   Since they support the earth, site walls are a critical requirement before roads and buildings can be built.  The problem facing Home Owner’s Associations of older communities is replacing these walls after the roads and buildings have already been built.  Although these timbers are pressure treated, their life expectancy is still only 20 years, roughly.

Replacing timber walls can be a logistical nightmare for the HOA.  Frequently, condos, townhouses, or streets are built on top of these site walls.  Without proper precautions, significant structural damage can result when these walls are replaced.  Access to the walls is also limited.  During the grading phase of site development, equipment is easily utilized with little in the way of physical obstacles.   Masonry units can be mechanically located to the most strategic spot, avoiding unnecessary manual labor.  This is rarely the case when replacing the wall.  Additionally, there are other building components may need to be temporarily removed and reinstalled.  Rails which are frequently installed above retaining walls to prevent accidental falls, would need to be removed.

Any townhome or condo HOA board with timber retaining walls should have a reserve study prepared as soon as possible.  Replacing retaining walls is a very expensive endeavor and requires many years of savings for their inevitable replacement.  Of course, the community can always go the assessment route….

An excellent local retaining wall company is Site Scapes, who schooled me about retaining walls when I was a site development manager.  They even do their engineering in house.

 

What a Reserve Study is NOT

Sometimes I get requests from Association Managers or HOA boards that indicate there is still some misconception concerning what specifically is included in a reserve study.  In helping to clarify what a reserve study is and what it is for, it would be useful to explain what a reserve study should not include.

Any expense that occurs annually, no matter how large should be part of the home owner’s association’s annual budget, NOT  a reserve study.  For example, if a condo community paints one of its buildings every year this expense should be included in the annual budget.  By the way, paint is a nebulous category due to some obscure IRS rules, and how an association files its tax returns, but we’ll discuss that in a future post… I promise.

Small expenses that occur periodically are usually funded through the annual budget, NOT  a reserve study..  What’s a small expense?  It depends on the community.  The threshold between the annual budget and reserve budget for a townhouse community maybe 300, it could be 3,000.  Typically, I try to include smaller items on the report, but will leave them unfunded.  If the home owner’s association feels differently after reviewing the reserve study, I can always include funding for these items.  A good example is light fixtures or interior doors.  I just performed a study for an 11 story condo tower at Wrightsville Beach.  They have a full time maintenance man on staff.  When required, he paints all the hallways and this is paid through the HOA’s annual budget.

A Reserve Study does NOT include Acts of God.  A reserve study accounts for predictable future costs.  I don’t own a crystal ball.   A bartender serves somebody one drink too many, and next thing you know you have a car where your monument used to be.  You won’t see that in a reserve study.  That’s where the HOA’s insurance comes in.

So… What is a Reserve Study?

Most people have no clue what a reserve study is.  In fact at family gatherings, I still have to explain to at least a couple of cousins and an uncle.  Some HOA board members have heard of a study, and while most association managers know what they are, confusion is quite common concerning what is included in a study and how a study should be used. I will start by giving a very basic explanation of what a reserve study is.  Hopefully future posts, will flesh out the concept of a reserve study in a logical fashion.

A reserve study is essentially a budget planning tool.  A reserve study is concerned with an association’s assets that are expensive to replace and have a useful life of more than 1 year.  A study will inventory a community’s assets and then provide a funding strategy to cover costs associated with the repair or replacement of these assets.  Retaining walls, streets, tennis courts, pools, roofs, and siding are the most obvious reserve items, but there are many more.  Our software has a database of literally hundreds of various assets.  It might be helpful to explain what a reserve study is NOT, but I will get to that in another post.