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Subject: Reserve Study and capital reserve budgets
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TerryK7
(Idaho)

Posts:1


04/28/2018 8:56 AM  
We are a small community with 76 homes. We have a lot of common area, so landscaping is our biggest expense. We do have a pool and a clubhouse. We just took over from the builder and have about 45k to devote to our reserve fund. I'm struggling with the best format and accrual method to save money for our capital expenses. Any advice would be much appreciated
TimB4
(Virginia)

Posts:16542


04/28/2018 9:42 AM  
You need a reserve study.

To learn about reserves, see the following thread on this forum:

Subject: Reserve Studies/Funds 101

Some links in the earlier postings may be broken but were corrected in later posts.

KerryL1
(California)

Posts:6691


04/28/2018 10:41 AM  
With Tim, I agree you should get a reserves study done by a certified reserves analyst. S/he'll list all of the times (components) your HOA should reserves (save up) for their eventual repair and replacement. The analyst will sliest how long its life is when new (estimated life), how much life that component has left (remaining useful life of RUL) and the estimated cost to repair and replace it.

You may have more components than you think, e.g., sprinkler systems, roads, curbs, exterior lighting of your common areas. You have a clubhouse but the study might estimate for roof repair and then for roof replacement; carpeting replacement will be a separate item; painting the exterior or residing it, a separate component. Why? Because they each have different estimated lives.

Ditto, the pool. It'll need to be resurfaced, it has pumps & motors involved, and may need new pool deck area some day.It has a fence around it. If you have a lot of poolside furniture, it may need to be restrapped in a few years and replaced in several.

So, get a study done and after it, your HOA board might be able to update it itself. The analyst yet will advise you how much to contribute a month so that you can repair and replace these in the future without having to resort to a social assessment.

Those repairs and replacements are not "capital expenses," which are for new things or big upgrades to something you're replacing, e.g., replacing a cheaper clubhouse roof with tiles.

Though a CA attorney's HOA website, visit Davis-stirling com, Main Index, Reserves, to see much info that applies nationally, not just to CA.

SteveB25
(Arizona)

Posts:68


07/03/2019 9:33 PM  
It sounds like you have never had a reserve study performed. For the initial study you should get it performed by someone who is knowledgeable in the task. This does not mean that you need a professional service provider, especially in light that you are a relatively small community. But, because you have a pool / clubhouse, that certainly raises the complexity.

If you are thinking of doing it yourself, which is very doable, you should read up on what goes into the reserve study. The State of California and State of Hawaii have both published excellent guidelines.

http://www.dre.ca.gov/files/pdf/re25.pdf
http://files.hawaii.gov/dcca/reb/condo_ed/condo_gen/condo_bod/condominium-reserves-reference-manual.pdf

Some additional resources are also available here ... http://reservestudyhoa.com/diy.html

The most important thing to get right ... or as close to right as you can get ... is the identification of all the reserve components. As was mentioned, you have a pool so pumps, filters, resurfacing, etc. need to accounted for. You have a clubhouse, so carpeting, roofing, painting, A/C components, etc. need to be accounted for.

Once you have your first reserve study, then updates are much simpler as the reserve components tend to not change.

Good luck,

Steve
GenoS
(Florida)

Posts:3298


07/04/2019 1:33 PM  
This place has a really good website about reserve studies including a nice example study. Disclaimer: I have no affiliation with them. My HOA has never dealt with them. I don't even think they operate in Florida.

One thing an outside Reserve Study will do for you is tell you things you probably don't want to hear. Preparing an in-house pseudo-study won't do that because often a board of directors will pre-determine the outcome it wants to see ("Yeah, don't include the pool in there."). I've been advocating for my HOA in Florida, where reserve studies are not mandatory, to get an outside independent Reserve Study done for 4 years. No luck so far.

With a reserve study such as the sample one above, I think the majority of associations will be lucky to have one or two board members who can even begin to comprehend it. I'd say "vast majority" but my sample size is too small to make that generaliztion. Last year I had a few color copies of the above sample reserve study printed and passed them around to directors and members of our Finance Committee. I said, "Imagine if we had something like this tailored for our community!" I received no feedback from any of them. Zero.
GenoS
(Florida)

Posts:3298


07/04/2019 1:33 PM  
Also, I'm sure Terry in Idaho found his answer somewhere already. He asked his question 14 months ago and hasn't posted anything else since then.
SteveB25
(Arizona)

Posts:68


07/04/2019 3:00 PM  
I believe you are correct about an outside study providing information that the Board may not want to hear. I believe, more likely though, is that an outside study -- assuming from a reputable provider -- will be less likely to leave something out.

In our HOA, we had an outside provider do a study and they were dreadful. They did not leave anything of importance out, but they performed the financial computations incorrectly. And ... they made inappropriate recommendations that were just dreadful for our community. I took it upon myself to remedy that and came up with a much better study.

Steve
SteveB25
(Arizona)

Posts:68


07/04/2019 4:08 PM  
One very common shortcoming that I have seen with reserve studies is the omission of the association's annual income statement and the annual operational expenses.

Why do I think this important? Because the association has to meet reserve expenses and the only way they can meet those expenses is by generating income ... typically through annual dues. These annual dues not only generate income for the reserve component replacement / maintenance, but also to meet annual operational expenses.

Why do most reserve studies ignore this? I have no idea? A typical study will recommend that the association contribute to the reserve fund some amount every year. It is an easy manner to also include an amount that must be set aside for operational expenses as well. And, typically, operational expenses will rise pretty much inline with annual inflation.

When we performed our own reserve study, we included all income sources and all expenses. This consisted of annual dues for our income and both operational and reserve expenses. Then we were able to demonstrate that increasing our annual dues each year we should be able to meet all these expenses. Bottom line, the most important thing to convey to the members of the community is that there will be enough funds every year to meet ALL expenses and they want to know what their expected contribution is likely be for each year. You can only do this if you include dues and operational expenses in the report.

Steve
GenoS
(Florida)

Posts:3298


07/04/2019 5:20 PM  
I can see how mistakes could happen, especially with the list of components and estimated costs, but where the actual financial calculations are performed - a mechanical process - I'd expect none. Especially if we were paying for it.

I inherited an Excel spreadsheet that had been in use here for years to calculate straight-line (component) reserve requirements. A CPA has been updating it annually until he sold his house and moved. There was a simple error in one of the formulas that had gone unnoticed forever until I became the first "another pair of eyes" to ever look at it. In the big picture it was rather inconsequential, but it was a good example of how even simple things can be overlooked.
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