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Reserve Planning |
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Reserve Planning is accomplish via a "Reserve Study" which identifies association maintained components, their useful lives, their costs of repair or replacement and a 30 year funding plan. The Reserve Study ensures that all owners pay a fair share, that money is there when needed and no more special assessments! Regenesis performs Reserve Studies in Oregon and SW Washington. For a no cost, no obligation proposal, call 503.977.7974 or Email Us. For more information:
Reserve Study Q&A What is a Reserve Study and how can it help a homeowner association better manage its funds and maintenance? The Reserve Study analyzes repair and replacement needs like roofing and painting that happen every year and provides a funding plan for accumulating money to perform this work when its needed. It is more a budgeting function than a construction or building analysis, although there is an element of that. The study is usually based on visual observations as opposed to forensic testing (tearing walls and roofs apart to see what's underneath). The Reserve Study assumes that regular and adequate maintenance is being done to prevent premature repairs or replacements. There are several parts to the Reserve Study process:
How should the Reserve Study recommendations be funded? A Reserve Study with no funds is a car with no gas: It'll go no where. The Reserve Study should provide a recommended Funding Plan which calls for regular and adequate contributions to pay for future repairs without the need of special assessments. For common wall communities, this is accomplished monthly. For HOAs with few assets, reserve contributions can be quarterly or annual, whatever the regular assessment (fees, dues) schedule is. If each member contributes a portion monthly, all members that own there along the 30 year time line will only contribute an amount attributable to their time of ownership. And all members will pay. This is the fair approach to reserve funding. How should these reserve funds be accounted for? Reserve funds should be kept separate from operating funds. If your reserve plan is complete (includes all components and a plan to fund them), establishing separate ledger accounts for each component is unnecessary. The Board should only spend more out of reserves for items that are included in the component list. How should the reserve funds be invested? It’s conceivable that reserves could grow to many thousands, or even millions, of dollars. Since the Reserve Study shows the Board when reserve funds will be needed, funds can be placed in higher yielding long term investments Every dollar earned in interest is a dollar less needed from the members. Increasing interest yield only one percent over 30 years amounts to tens of thousands of dollars for the average HOA. If an HOA is large and accumulating hundreds of thousands or millions of dollars in reserves, it makes sense to hire a professional investment advisor to manage the funds. Conservative investments like government securities or certificates of deposit (CDs) are recommended, however, there are other options that an advisor can recommend. When should a Reserve Study be performed? All homeowner associations, regardless of size, should have a Reserve Study done, the sooner, the better. The study will compare what reserve funds you currently have versus what you should have. The concept is called the Percent Funded. Along the 30 year Reserve Study timeline, there is an ideal amount of money the HOA should set aside known as 100% Funded. The Percent Funded function shows how the HOA is doing relative to the ideal. For example, it is not uncommon for older HOAs that have not been properly funding to be 20% Funded or less. Knowing the Percent Funded is critical to chart a funding plan to catch up. You need to know where you are to know where you need to go. If your HOA is newer, the sooner you perform a Reserve Study and begin funding it, the sooner you will reach the 100% Funded ideal. How often should the Reserve Study be updated? Once the initial Reserve Study is completed and the funding plan is in place, yearly updates need to be performed even though they are relatively simply to do. Even if no reserve projects are done, the rate of inflation and the yield on invested funds always change year to year. Even a 1% change in either of these factors causes a huge impact on the thirty year projection due to interest compounding. What happens if reserves are under funded? It depends. If the association has inadequate reserve funds to begin with, the Reserve Study will show the need for "catch up". How fast the HOA catches up depends on how soon funds are needed. If there is an expensive and urgent repair like roofing, a special assessment may be needed to address it. If major repairs are some years off, the funding plan can usually accrue the money through regular assessments (fees, dues). Or, using a combination of both special and regular assessments may be the way to go. Whatever course of action taken, the goal should be to reach "100% Funding". What sorts of financial problems can homeowner associations encounter with inadequate reserve funds? Without adequate reserves, associations rely on special assessments. Special assessments are unfair because owners that have bought and sold in the past fail to pay their fair share and current owners end up "holding the bag". Special assessments are a hardship on owners and some may be uncollectible if an owner’s equity is small, he is foreclosed or declares bankruptcy. Also, since special assessments are unpopular, the tendency of the Board is to postpone major renovations. This deferral accelerates the deterioration process, detracts from curb appeal and erodes home market values. A reserve funding plan with regular monthly contributions from each owner is both fair and permits major work to be done when it’s needed. Can poorly managed reserve funds affect the sale of units? Absolutely. Smart buyers and lenders look closely at how reserve funds are handled. Lack of reserves is a red flag for inevitable and costly special assessments (a sign of poor planning). If given the choice between an well maintained HOA with healthy reserves and one with little or none, which would be the wiser investment? Which types of repairs and replacements must be paid for by HOA funds? The governing documents define what are the association’s responsibility. In common wall communities like condominiums, the association is usually responsible for items like roofing, landscaping, siding, painting, paving, sidewalks, pools, clubhouses, signage and fencing. But there are many more components. The average condominium has between 15 and 50 reserve components that should be considered. High rise co-ops and condos can have hundreds. What kind of qualifications should a Reserve Study provider have? Besides considerable experience doing reserve studies and a list of satisfied HOA client references, a qualified Reserve Study provider should have credentials, good budgeting skills, extensive knowledge of construction and homeowner association operations. Several organizations offer credentials for Reserve Study providers and maintain a list of members. Association of Professional Reserve Analysts credentials the Professional Reserve Analyst (PRA). How much does a Reserve Study cost? If the HOA has a qualified volunteer experienced in construction cost estimating, the cost is nothing. However, there are clear advantages to having a knowledgeable Reserve Study professional perform the work. Aside from the expertise, knowledge of local contractors and current costs, there is no conflict of interest that HOA members have. Costs to perform a Reserve Study vary based on the size of the HOA, the number of components and the time needed for field work and report compilation. The initial Reserve Study costs the most since it involves time to gather the component data. Reserve Study costs range from $1500 to $4000 for HOAs up to 100 units (although extraordinary circumstances, number of components or high cost locations can drive cost higher). Large communities with many reserve assets can expect to pay tens of thousands of dollars. If there are particular problems like dryrot, structural, soil or drainage, an engineering study should be incorporated with the Reserve Study. Recommended annual updates are much less costly since they involve only tweaking the initial study. A properly funded Reserve Study is an invaluable tool for maintaining value and promoting harmony. When HOA member assets are properly maintained, members profit from higher market values of their homes. Since major maintenance is done consistently and uniformly, no one is getting a better deal then anyone else. The community is more livable and improved curb appeal engenders community pride. When the members like living there, they stay longer and are more willing to volunteer. Oh, one other amazing benefit: No More Special Assessments! What more could you ask for? |
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