Addressing Common Challenges in Reserve Studies: Q&A Session

Robert Nordlund 00:07

well, thank you, Paige, and welcome everyone. It’s a pleasure to be with you today. Thank you for taking time out of your day to join us. Well, usually our webinars are teaching times, but today it’s going to be a Q and A session, Paige, whose voice you just heard, is our Director of Marketing, and she’s very sensitive to the interests of our clients, what they’re telling us, and she felt it was going to be a good idea to have a Q and A session, especially this time of year. So we’re here, David and I, to be walking you through, helping you with the questions that you might have about your reserve study that you’re in process with, one that you received recently, one that you’re working with when you’re trying to understand the budget. How do we fit this into the budget? So this is what we’re going to be doing today. We’re going to follow this agenda where I’m going to start out with a little bit of time just kind of walking you through. How do we make our decisions? What are the rules? What’s the framework in this industry? If it was a game, what are the rules? So I’m going to start out with a few minutes, and starts with the understanding that this whole industry that we’re working with, the community, association industry, it’s an interesting division between the things that belong to the association, the common areas, and then the things that are owned by the individual owners. So there’s a separation there. We’re going to be talking about what belongs to the association today, those common area elements, and that’s important, because due to Mother Nature and Father Time, all those common areas are in a constant state of deterioration. They’re always getting older and closer to the time they’re going to need to be repaired or replaced. That’s just the world that we live in. And it’s going to be that deterioration that defines the cost, how fast things are deteriorating, what’s deteriorating when it’s going to need that cash, when there’s going to be a cash drop at your association, because you need to spend the money. And here in the community association world, it’s up to the board to set a budget that keeps up. That’s their chartered responsibility, and that’s found in your governing documents. And then part of the teamwork, it’s then up to the owners to pay their fair share. They became a member of the community. So the board says, Hey folks, this is what it costs to live here. And the owners say, okay, you know how much per month, how much per quarter, how much per year, and that’s how the association stays operable, how it stays functional, how it stays sustainable. And in this situation, I have to lay again, some foundational ideas that owning and caring for real estate is expensive, carefree is something that has been a term that has been rolled around when they speak about community association living.

Robert Nordlund 03:05

It’s great to live in an association, because the association takes care of the park or the green belts or the hallways or the elevators, things like that, but careful. It may be carefree, but it’s not free, because remember, all those common areas don’t take care of themselves. And as we prepare these reserve studies, I want to make it clear that we’re not in the guessing business. We identify the components, these fundamental common area elements, that are going to appear in your reserve study based on national reserve study standards, there’s a three part test that you see on screen. We’ll refer to this three part test as we get into the Q and A that anything appearing in the reserve study has to pass all three tests, which is the associations, obligation, again, a common area, maintenance responsibility. It’s reasonably anticipated we are in the budget business, and it has to be a significant cost. Otherwise, if it was insignificant, that’d be trivial, and you’d handle it out of the operational maintenance budget. And we’re not, again, guessing about something 10 or 20 or 30 years into the future, because we look at it now, we establish its condition. And then we update the reserve study at least every third year from this point onwards, so there’s no wild presumptions about the future. And then we evaluate the starting point, the financial starting point, how much cash you have? Is that good, or is that not good? You may have 100,000 or $500,000 and the big question is, does that work for you? Is that a good starting point or not? And that’s measured by this concept called percent funded. And I like the little illustration that you see on the screen. It’s the balance between what’s going on at the association, how much deterioration. You have and how much cash you have, you want them to be in balance. And in balance is the 100% point. And this parameter, percent funded, is significant because it’s a key indicator of, are you prepared or not. Now, the key result when you’re not prepared is a special assessment recommendation. And you can see on your chart here that in the zero to 30% range, special assessment recommendations are common, and when you get to 70% and above, you can see that the special assessment recommendations go almost to zero. Basically it means you have enough cash. And so that tells us where we want to direct you. We want to direct you towards having enough cash so that you’re free from the surprises of special assessments. And then, with that starting point, we think, Okay, what do we craft, as far as a funding plan, and we’re guided again by National Reserve studies standards, with a four part funding principles. We want you to have sufficient cash. We want that multi year plan to be stable from year to year. We want to be evenly distributed over the homeowners, so everyone pays their fair share over time, kind of a total cost of ownership issue, and we want it to be fiscally responsible. We want a plan that the board can stand on, that the homeowners, although they may not like it, they have to say, well, darn it, it is reasonable and it’s responsible, and that’s their job to tell us what it costs to live here in happy acres. Now, when we do this, we are using the National Reserve safety standards. It’s going to guide our terminology. I probably should have put that first, but component selection, funding goal, funding methodology, funding plan, strategy and I asterisked funding goal and funding plan strategy because I want to just explain what we’re working with here. This is a sample graph. We may do a few examples today, depending on your questions, but it goes time is left to right in years, in five year increments. And what we’re graphing here is the percent funded. You can see they start at 40 some percent funded, and they end up at about the 100% point. Now what we describe this as is the process of heading towards a goal. It means that we are, in this case, a full funded goal. We are full funding, or fully funding, okay, that’s the process they’re at. Let’s say 42% funded. Now they are not fully funded, but they are fully funding. And David, can I get you to help clarify with your Florida background here,

David Whann 08:03

absolutely, we’ve always described it, especially in the past, when I’ve explained explained it to clients, is funding is an action, and typically, when it comes to legislation, especially that which we’ve seen in New Jersey and Florida, the requirements typically revolve around fully funding or adequately funding your reserves, which is looking forward in this same graph, the 100% funded in relation to the national reserve study standards that is described as a position it is being 100% funded at any given time. So it’s usually, or typically, a yes no answer, are you fully funded? Yes or no, that doesn’t mean, let’s say you’re 60% funded. You may still be fully funding because it is a progression over time. We like to say it’s a marathon, not a sprint, and just because you’re not fully funded now funded now you may not, you may still be fully funding towards a better and brighter future. Fantastic.

Robert Nordlund 09:09

Okay, so the difference between the process, the action and the condition of being fully funded, and as we talk about these issues today, having to do with reserve stays, basically the cost of what we’re going to have to recommend your fund, recommended reserve transfers that’s primarily driven by the components. Do you have balconies? Do you have elevators? Do you have five tennis courts? Do you have swimming pools? All these kinds of things? Do you have wood siding, all these kinds of things, there’s a secondary factor, and it’s when these projects happen. And then if you have a strong or a weak starting point, some other influences are interest and inflation. Are you getting a lot of. Interest on your reserve cash or just a little bit and then the funding goal, are you trying to insulate yourself from special assessments by fundamentally being prepared? Or are you going to risk having special assessments by having a weak reserve fund? So there’s primary and secondary factors, but these all influence the results in your reserve study. And the My mom used to say, the proof is in the pudding. And so you can see this real estate agent showing this couple here, kind of a rundown Association. And what do you say? As you can see, they aren’t wasting the HOA dues on funding reserves. Well, that’s reflected in home values. So it’s kind of a circle here. You want to take good care of the property. The governing documents tell you to it’s good for home values, but yes, it costs money to take good care of the property. And so with that introduction, we’re now going to get into the meat of today’s program fielding your questions. So Paige, what has our audience told us that they want to hear about?

Paige Daniels 11:11

All right, thanks, Robert, yeah, we had quite a few questions coming in during your intro. So let’s go ahead and jump in first question. Our reserve study recommends we have 70% funded, and we are currently at 55.7% 70 seems way too high. Can you help with that?

Robert Nordlund 11:28

Yeah, let me take you back. I may do this. I hope you’re not getting seasick. There we go, this one, this one. And we can, we can show some other ideas. But you see in this chart that there’s the cost is driven by mother nature and Father Time. The question is, are you going to be prepared, or are you going to be surprised? And it’s not a high goal to be 100% funded. I want to make that clear about 30% between 28 and 30% of the associations across the country are above 70% funded. That’s a lot of associations. So it would be a simple thing to tweak your reserve funding a little bit faster, so you’re going a little bit faster than the rate that things are deteriorating, and over the next five years or so, maybe 10 years, climb up and get yourself into the 70% range and have a longer goal of being closer to 100% David, Have I missed anything there? I

David Whann 12:37

would say so, or I don’t think you’ve missed anything. I just have one thing to add in that it usually is a moral or ethical argument of the 100% funded mark. And that’s truly one of the main pillars of our recommendations within our reserve studies, is a fully funding recommendation to eventually get to 100% and the main reason for that is, if you aim for anything lesser than that, oftentimes there is deterioration that has occurred that has not been funded, so you’re always behind the eight ball and never in front of or proactively accounting for those items. Now we also take a look at this data in the chart that Robert has showed, and that does give us a very clear viewpoint, because one of the major goals is to eliminate or mitigate special assessments whenever we can eliminate surprises. And with the data that we have, the 70% mark is really where you see you know significant difference where it’s mitigated to nearly the highest degree, and so anything beyond that is that moral eye ground, it’s collecting everything that’s deteriorating, and we still believe in that. But after that 70% mark, you’ve mitigated, or should have mitigated, the majority of your special assessment risk and eliminated those surprises.

Paige Daniels 14:00

Okay, great. Next question here, in addition to a reserve fund, is it also advisable for an HOA to establish a rainy day fund or an emergency fund to cover unexpected, medium to larger community expenses that may not be covered by insurance?

Robert Nordlund 14:14

That’s a good question. We have some clients setting aside something they call their deductible fund, and they have that there because it’s it’s not a predictable expense. Remember, that’s one of the three part test, one element of the three part test. We have some that set aside a little margin in case they have a lot of snow removal in a particular year. That way they don’t kill their operating budget and the nominal amount of snow removal costs that they have. So that’s a nice, a nice extra little pocket of money on the side. David, your thoughts on that?

David Whann 14:59

It. My personal opinion, I think for overages and contingencies where the unknown develops, that is a strong idea to have some rainy day fund. One thing I do want to point out is typically when it comes to deductibles, at least personally, I’ve always held that reserves when adequately or fully funded, especially typically in your reserve balance, end up having more than the necessary deductible, and that deductible should be expensed from reserve items. So in an example, let’s say Florida gets hit by another hurricane. Let’s cross our fingers. Hope that doesn’t happen for another five or 10 years, if not more. But if you have fully funded your reserves for five of the 20 years, you would theoretically have five twentieths or one quarter of the total replacement cost of that that roof system. And so as you move forward in time, you’re only collecting or having in your reserves a higher and higher proportion of that total replacement cost. At a certain point, you should have more than the deductible itself, and would be able to fully fund the deductible through reserves. Now that doesn’t always happen. It isn’t always that, let’s say convenient, especially say, in the first five years you may not have enough for that deductible because you just spent everything to replace that roof. So it is a balancing act. And I think as we move through this Q and A, Robert and I will probably continue to hammer that term balance home. And it’s something that should absolutely be considered, but there should be an asterisk there, because, let’s say, over funding a contingency fund could pull away your attention from fully funding your reserves, or cost the homeowners more when there is already funds that could be sufficient in your reserves. So it’s ongoing consideration.

Robert Nordlund 16:57

Yeah, I think our council is going to be check with your reserve study provider and ask them, I would

Paige Daniels 17:03

say, so yeah, all right, can a board spend money on items not listed in the reserve study? The expenditures are on non capital items and were not listed in the minutes as being spent from reserves, not alone.

Robert Nordlund 17:15

David, can we? Let’s maybe talk about a couple of scenarios. Let’s say, let me try to amplify that question a little bit. Let’s say your reserve component list is pretty simple, and you want to spend some money on something you don’t see in the reserve state. Let’s say the Pool Heater. And you say, well, it’s Association. Responsibility fails every 10 years, pretty much on schedule, and it’s significant cost. Why is that not there? It seems to meet the criteria of being a reserve component. I would say, reach out to your reserve, say, provider and say, How are we supposed to do this? That’s always going to be an easy call, easy email, if it’s something different, like, can we, well, the garbage truck always comes around the back corner, and on that back corner it always, regularly, it cracks our asphalt, makes potholes. It always beats up the asphalt at the rear corner of our association. Can we replace the asphalt there with concrete from reserves? There’s interesting questions. There’s gray areas. Is that a capital improvement? There’s a lot of answering of that question. That is, it depends. So David, can you think of some other gray area?

David Whann 18:40

Yeah, I think I can try to hammer down at least the ones. We can clarify for sure, new additions, so capital expenditures that aren’t in a reserve study. But all the rage right now is, let’s say pickleball, pickleball courts. No, you shouldn’t use reserves to newly install a pickleball court where those weren’t in the past, or, let’s say there were no pickleball courts in the past. We don’t believe you should use reserve funds for something that didn’t exist. The purpose of reserve funds is ongoing, proactive and purposeful maintenance of your existing components within a community. However, Robert talked about gray areas. Now we’re going to talk about, let’s say, conversion of a tennis court to pickleball courts, because no one uses that tennis court anymore, and we need to shift over or shift pace. The answer is, it depends, in this case, but also potentially a mix of both. David, can reserve funds be used? David, initially, yes.

Robert Nordlund 19:39

I was wondering if page has a scorecard on how many times you and I say it depends.

David Whann 19:45

Absolutely you keeping count page, we have 5050, so far.

Paige Daniels 19:49

Let me make a game out of it.

David Whann 19:53

So with the conversion of the tennis court to the pickleball courts, technically, let’s say your your tennis court. Court and all of its related components or assets are within the reserve study, replacement of it, resurfacing of the court itself, that does open up to use of the existing reserve funds for those items as part of the conversion, but it is likely that that conversion is going to be more expensive than a typical resurface or replacement, because you’re converting it, it’s a higher scope of work. So this is where you get into probably good to discuss with your reserve study provider, your accountant, I would say, is another good one. And as always, we’re not legal counsel. So at that point you also probably want to tie in your legal counsel to confirm it’s all wrapped into a nice bow, but you may have the opportunity to pull some reserve funds from existing tennis court, and you may have to produce other funds elsewhere in the form of special assessment or loan to get that done, as the additional supplemental cost. So I was talking to, you know, new addition and conversion.

Robert Nordlund 21:01

Yeah, what you’re thinking about, if the tennis court needs to be resurfaced, is there any problem with resurfacing it and restriping it for a pickleball court and putting in a couple new some new elements to make it a quick transition so it can be both?

David Whann 21:21

Typically, I would find no issue in it. Usually, the only time you find or have major issues is these huge at least in my experience, complexes that turn four tennis courts into 16 pickleball courts, and you’re talking about difference of 10s, hundreds of 1000s between the two projects in adding a net or two in one line of four foot chain link fencing between the two new pickleball courts or portable nets is something that seems to become more frequent. Those would be allowable, in my opinion, but it does

Robert Nordlund 21:57

vary from case to case. Yeah, same here. That to me, that seems like an easy yes.

Paige Daniels 22:02

All right, we are taking over a new Hoa, which reserves seem to be very underfunded. How should we approach this before going to the board with requesting a reserve study, which they aren’t wanting to do just yet?

Robert Nordlund 22:14

Wow, sounds like a manager asking, what do we do? I think getting the reserve study is the first step. You need to know where you stand. What are the obligations, what’s the common area, maintenance responsibilities, get them in a list, and that all sounds like a reserve study. David, isn’t that, or what’s your thinking? Completely

David Whann 22:35

agreed when it comes to new developments, especially when there’s a transfer to an HOA. The unfortunate truth is that oftentimes you start behind eight ball, because development may have taken multiple years in a lot of development meant cases so your fully funded balance, or the deterioration that has occurred to this point has already started. I think it’s a common saying that Robert uses the is the, is it the bill always comes to or Time waits for no man, yes. Vote tighten, tighten.

Robert Nordlund 23:07

Time wait for no man, yeah. Well, what do you what about if it’s a manager taking over a new account? Okay? Happy Valley of Ellis comes and says, Hey, we want to, we want you guys to manage us. You say, great. So you have another account. Your management company is growing, and you look at Happy Valley villas, and boy, it’s a dog. So you feel good about getting a new account, but Yikes, this is going to be trouble. Probably the reason they are trouble is they’ve been underfunding their budget. They’ve been borrowing from reserves without repaying, stalling on getting projects done. You need to have order and you need to have a plan. If you’re going to do a good job managing that association, you need to have a plan moving forward. And that’s a reserve study.

23:58

Absolutely agree

Paige Daniels 24:00

from the marketing point of view, I’d also say educate them. I think that if you can help them understand why they need a reserve, study, the importance the fear of special assessments, anything like that. Share this webinar with them. Share other webinars, articles, whatever you can just to help them. Help educate them as well.

Robert Nordlund 24:20

Yeah, you don’t have to stand on your own word. It’s a this is what happens in the community association industry. You need to set aside funds to take care of your property, or Mother Nature and Father Time are going to dance all over your place, and the property values are going to go down. So it’s just normal, best practice for what to do in the community association. Community, association, industry,

Paige Daniels 24:45

absolutely, all right. Where can we get a copy of the reserve study standards? We have an irrigation system, and they are suggesting a 50 year life. Everything I can see says PVC is a 50 to 100 year life. What is the standard?

Robert Nordlund 24:57

I hear two questions there. I. Um, one is, what are the National Reserve safety standards? And that’s, I can put a link in the outline. It’s on the CAI national website, which is Cai online.org, you have to click through a few things to actually find the standards. But it sounds like they’re looking for, what are the expectations for component x, for useful life, that kind of thing. Wow. I’ve spent 38 years with this company, and we have for those 38 years, been primarily basing our useful life expectations on what we see actually happening among our clients. So we have the good fortune to be able to build that off of our experience experience with clients. David, could they just ask their landscaper if they want to know how long does plastic pipe last?

David Whann 25:51

I would say So, typically, the best practice or best recommendation would be to consult with a an industry professional. What I will say is that it defends realistically. There’s a lot of environmental factors that can affect this, so one of the major items is tree root systems, how quickly they can grow around said pipe and say, invade and break those pipes. So oftentimes, you may even see useful lives shorter than that, because certain systems could be surrounded by oak trees and be torn to shreds within 30 years, if those oaks are, say, older in nature. Now the best answer is probably going to come from that landscaping or irrigation vendor, because they know your property specifically a reserve study provider does their best to look at the property and visually assess it, but it would be next to impossible unless they also brought a shovel and and dug up the entire community for them to visually assess those pipes. So I believe that they’re probably using a form of professional judgment to include it because they feel it’s the best thing to do, but it may not be the be all say all when it comes to that, there are other factors that I do want to note, just in relation to the reserve study standards that may also help. In this case, the reserve study standards I touched on state that it has to be reasonably anticipated, and so a vendor or even a reserve study provider may not want to commit to say more than the bare minimum estimate of that piping. You noted on your general research that it’s 50 to 100 years, and it is possible, in many cases that pvc piping can last that long, but there’s so many different variables that to state it would is a tough call for a professional to make, especially when there’s limited information on it. So within those there, there are some limitations in what reserve professionals can or will make within their judgments as a form of protection and a form of really, what I’ve described as our belief, at which point you should be financially capable of replacing, in this case, your irrigation system. If your irrigation system, let’s say, gets to 50 years old, is still functioning properly and you have minimal repairs here and there and not exponentially increasing year to year, then you may be able to push out the remaining useful life by several years at that point, but saying maybe in year 10 that it could last another 50 years is a tough judgment call. So there may be a company standard or of you know, reserve professionals opinion towards the standard that they use. So those do weigh into our considerations when creating a reserve study.

Robert Nordlund 28:50

David, while you were talking, I was thinking more and more I like that idea of just asking your landscaper, because it depends on so many factors. Are the plastic pipes above the ground and getting hit by the sun and getting brittle. Are they? Are you in a area of the country where you’re getting freeze, thaw, and so the pipes are sometimes icing up and cracking? Is the ground stable or unstable? Are there kids around there chasing is it next to a field and there’s going to be people walking on it? There’s so many factors that your landscaper probably knows, yeah, this is trouble you’re going to be happy to get 15 years out of this. Or they may say, Jesus, we not in my lifetime. And that may be just plain a good thing to know

Paige Daniels 29:41

absolutely this next question, kind of follows, follows up on that, are your estimated replacement costs determined by national average or specific to the city where the association is located?

Robert Nordlund 29:51

David, do you want to take

David Whann 29:53

on? Yeah, we do consider national data within. These price estimates, but a lot of times, and in most cases, within the reserve studies that at least we provide, everything is regionally, driven by our offices and catered to within the specific decisions of each project manager, the city and or location that each Association resides in. So to answer that question, it’s a lot more geographically driven. We know there are differences between, say, Los Angeles and Des Moines and, you know, New York City versus Orlando, Florida. They’re all regionally driven. And you know, the difference needs to be applied within the reserve studies?

Robert Nordlund 30:41

Yeah, I want to add that there’s a lot of factors in there, so it’s not just the cost, it’s the useful life. Again, are you in a alpine environment where you have extreme weather, and then there’s, as you would you say, Los Angeles, Des Moines, Iowa and New York, there’s incredible differences in labor costs. And then the materials. There may be some materials that are more popular in some due to style, construction style, some areas of the country than others. So what we do is primarily driven locally. Although we are sensitive to national averages, we know that prices are creeping up at a certain rate on a national level, but it’s not going to be too big of a difference, cost wise, of the actual material, because any company can put it on a truck and get it anywhere in this country without too much of a problem. So think useful life. Material costs, labor costs, those all dial in to tell you what it’s going to cost in your association, and the cost that appears in at least an association reserves reserve study is locally based.

Paige Daniels 31:55

Next question here, we’re a new board playing catch up, because dues remain flat for eight years. How do we prioritize work when there are several large, costly projects, all of them deferred well past their remaining useful life? Do you recommend we involve homeowners to determine project priority, to increase community support or support? And how do we tie in the benefit of this work in a way that helps homeowners understand and accept shorter term financial pain in exchange for longer term value.

David Whann 32:21

That was a loaded question, wasn’t it? That’s the loaded question. Paige, would you be able to shift that over to the answer section so I can track that one down even

Robert Nordlund 32:31

let me I started writing things down when I think about priority, the first thing is life safety. So we’re talking balconies. We don’t want anything collapsing. We don’t want anything getting hurt, anyone getting hurt. We don’t want trees with limbs are going to fall and hit somebody. Carports are going to drop on the cars. So safety is number one. Number two is something that’s going to increase in cost. So a roof catch it before it leaks, because once it starts to leak, it’s going to get really expensive because all of a sudden you’re doing a lot of interior damage repairs. This is another going to going to be another situation where you need to reach out to your reserve study provider. They’re going to be able to help, and they’re going to be able to maybe play some scenarios and dial in, hopefully, an answer that involves probably a combination of some special assessment now to give you a cash infusion to get started, maybe you tackle the safety problems right now and then next year you’ll be able to do the roof project. So combination of special assessment and assessment increases. I have a feeling that your homeowners know the place is starting to look run down, and that’s a problem we got to solve. So if your monthly assessments need to go up from 350, to 425, your sales pitch is folks owning real estate is expensive, we need to catch up. The reality is, we’re going backwards. We’re not keeping up.

David Whann 34:07

And just to add a couple of points to that, the specific question too, should we recommend or involving homeowners to determine project priority, to add on to Robert’s comment? Typically, the answer would be no when it comes to priority of safety and necessary projects. The main reason being, there’s a common saying, too many cooks in the kitchen. When you start giving everybody a say in this, you’re going to sit in the board of directors meeting for five hours and feel like nothing got done, because everybody’s going to pitch in saying which one they think needs to be done first. So there are opportunities to involve them. So when we say necessary projects, so life safety, those are absolutely necessary. And then you say necessary projects, to say the function of a building. And in this case, I’m going to use a high rise as an example. If. The cooling tower is older, everybody is going to be upset if that cooling tower goes down and there’s no air conditioning in it, because everybody is then then suffering. So as a board or as a manager trying to wade the waters of how much involvement to provide those types of things, probably not those would be deemed necessary and higher priority than any subjective items. Some that you can levy to increase community support is typically the esthetic items, so your lobby remodel, or, you know, the billiards room versus the hallways versus, you know, those types of things that are esthetic or visual, but may be more of luxury. I guess you could say, when it comes to funding those projects, that may be something to boost, to get some support one way or the other as to which one to tackle first. You also should consider, I had noted down downtime, so if your elevator is getting to the age of modern needing modernization or replacement, the downtime for elevators now throughout the country is six to 12 months, potentially up to 18 to 24 depending on the vendor and the amount of demand in your your region. So you may need to get the ball rolling now, but when it actually is done, you may be three or four projects finished by the time they actually arrive on site to start that project. And I assume that this question revolves around project management as much as funding. So we know that there is a reality to how much can actually be done on one property at any given time, and doing too many puts an enormous strain on the board members or the property manager to get those done and oversee them. So there is that reality that we do acknowledge, you can’t delay the things that have to be done for safety purposes, but prioritizing those and having a strong knowledge of how long it’s going to take to start up, specify or create specifications for and then actually conduct the work, including downtime or lead time, is important to understand. Hey,

Robert Nordlund 37:10

David, I had one client, six stories, two elevators, and they were in a bad situation. Didn’t have much cash, and old elevators, and they made the call to modernize just one of their two elevators. That way, they were crossing their fingers that the old one was going to squeeze out couple three more years. And in that interim, they were getting the new one. And when we got there, the new one was functioning, and they were all breathing a sigh of relief that, okay, the new one’s going. New one’s going to work for 30 years. We’re just going to ride the old one until it dies, and that was going to be, hopefully another five years or so. But you can place strategy on this. And sometimes, as David was suggesting, be proactive, appreciate maybe sometimes it’s good to spend a little bit of money now and get things fixed and working so we have firm ground so you can take a breath and work on other problems. It’s an interesting challenge that an older community or a deteriorated community presents, and again, check with your reserve study provider. They can help help you navigate forward. Because we’ve seen so many different things, sometimes things done well, sometimes, sometimes foolish decisions that boards have made, we can help you benefit from those lessons learned.

David Whann 38:36

And I would say most reserve study providers should be happy to present to your board of directors or your membership in that way. I know I’ve sat, or I’ve stood in front of hundreds of individuals to say these very things is, you know, these are the projects that need to be done. This is the purpose of the reserve study. This is why a special assessment needs to be, you know, set and collected is because you have these items that are pressing and there is always a discussion with when it comes to customer service, the report, what, even though maybe it shows a zero remaining life, what may be considerable, to defer by a year or two, with minimal effect to your reserve study, let’s Say component list, so you can shift them back, but it won’t meaningfully cause a negative effect to the community itself. So your project manager should be a friend and a resource in that and provide guidance as to whether they feel that’s possible or not, and that will also assist in your presentation to the membership or they may present for you and then take that load off of you.

Paige Daniels 39:44

Let’s see here, can reserve funds be used to extend the life of an item by doing

Robert Nordlund 39:49

repairs? Yes, I think you see David nodding. I’m leaning Yes. Minor repairs are operational budget issues, but like a repair, if you’re going to repair a quarter of the roof. Roof and give your whole roof system another five years. That’s a good use of reserve funds, if you can replace a gate area of your perimeter fence, and that way do a repair there and stall the entire fence replacement another few years. Again, good use of reserve, but check, check with the reserve state provider. They may have some insights for your particular property when you get to that change point between just spend some of your operational money minor repair versus withdraw from reserves. Okay,

Paige Daniels 40:37

we changed our procedures in maintaining our tile roofs on several buildings as such, we believe we have extended the life of said roofs by at least 20 years each. Thus we appear to be over funded for replacement for said roofs, and would like to transfer a portion of those reserves to another component that is quite low in its percent funded equation. Can we do this? David,

Robert Nordlund 40:56

that sounds like a Florida question. Straight line Florida question.

David Whann 41:00

I’m going to assume that this is a Florida client, or a client that is using the component method towards funding reserves, the transition of funds from an existing reserve account to another typically. And I would recommend consulting with legal counsel and your accountant before doing so, the process that we saw unfolding most of the time is a meaningful transfer through a vote and acceptance of membership. So usually there’s more freedom to allocate funds differently within your existing budget as a board decision. So allocation, again, the action of funding. Now, if the funds are funded in that position, in the way that they are, there were typically more hurdles to go from one to the other, one account to the other, I should say, with transfers. So this did happen, and what our most frequent recommendation was, in this case, is to consider pooling your reserve funds. And because of that, you would no longer have a need to transfer funds from one place to the other. It would allow a an aggregation or a combination of all of those funds into one pool, and then the overage of, let’s say your your roofing, is already accounted for in that calculation and can be used for those reserve items. Before I conclude, I do want to note that I have had clients argue, or note the security in having specific reserve accounts. So roof versus painting versus exterior lights versus asphalt, and we do acknowledge those as a way of protection that was born upon embezzlement, stealing or misallocation of funds in prior years, but in the current time that is becoming less and less frequent, or should be with the available amount of information to homeowners budget should be provided every year with a reserve schedule, and with that, those board members or those homeowners should know what is coming due by looking at said reserve schedule and by attending the annual meeting that’s occurring, usually, there’s a discussion of what’s in the purview of next year or the next couple of years. So, long story short, yes, you can. My belief is you’re likely to have to follow some steps that will be guided by your accountant or legal attorney. But also we ask that you consider or discuss with your reserve study provider the option of pooling your reserve funds as well, which would also take a membership

Paige Daniels 43:40

vote. It did. The person wrote back in, it’s a California entity. Oh, interesting,

Robert Nordlund 43:46

crazy. We see that very rarely in California. David is generally from the Tampa area, so he’s the Florida expert on this show today, but not in California. Gee, pull your reserves. Do the cash flow method? The problem goes away. Simple answer,

Paige Daniels 44:09

okay, can a community achieve fully funded status, or at least 70% funded through baseline funding?

Robert Nordlund 44:15

David, now let me, why don’t you introduce kind of the idea, and I will demonstrate, how about that?

David Whann 44:21

Sure? I would say it’s possible, but not often. So the goal of a baseline funding plan is only to keep your reserves above zero or cash positive through a 30 year projection. So it is possible that in the ups and downs of that cash flow projection that you reach 70% and the next year you could potentially reach 0% and you have $500 in your reserves. It all depends on the timing and cost and what we typically refer to as spread of your reserve components. Yes, actually, sorry, the significance, I guess you could call them up to reserve components within your reserve study, if you have one item that is 80% of your reserves, it may look like you’re funding merely at the fully funding level, but then as soon as you expense that, you could drop the 10% or lower, because all of it was allocated to that one. Io, Robert, do you have anything

Robert Nordlund 45:24

to add to that? Yeah, I pulled up a Uplanit case here. I just wanted to show what’s going on, kind of in that PowerPoint slide that I showed earlier, where you saw the association reserve fund growing towards 100% point. Hopefully you’re seeing here that this association coincidentally starting out at maybe about 45% funded. And this you can see is a full funding plan. They go from where they are. The net effect is they’re going to end up at 100% point and stabilize there. You can note here that that’s 20 340 per month. Now let’s go to baseline, and you can see now all they’re doing is bouncing around, just staying above zero. If we were to extend it, they would bounce around and bounce around and bounce around between what zero and 50, zero, 60 in this case, but a baseline plan doesn’t net get you to fully funded. You’re always in that, as I like to think, the zero to 30% scary range where you’re tempting special assessments if things don’t go perfectly, right? So what do we say? 2340, and baseline plan is 2090, and again, the difference is striving to strengthen your reserves so that you’re not going to surprise your owners with special assessment. You’re just confronting the reality of the ongoing rate of deterioration.

Paige Daniels 47:04

I thought this was an interesting question, so I’m curious what your answers would be here. I’m new to a board. What are the top three recommendations for me to start with? I’m an accountant, so the financial stuff doesn’t concern me. What should I be looking for, concerned about asking about related to our reserve

Robert Nordlund 47:21

Okay? When I think about that, I say, Do you have a reserve study? Who is it prepared by? Is the is the person? A credentialed person? Do they have their RS or pra those are the two credentials in the reserves a field. And when was it prepared? You want a reserve study within the last three years? Anything else, pretty much worthless, especially you look back the last three years. We’ve had covid We’ve had high inflation. We’ve learned things like supply chain and so once you know those three things, look for what was recommended in the funding plan? Are you doing it? So if you’re the new board, and you find out the recommendation was $2,340 and you’re only funding $1,000 a month, you know you’re drowning. And look at your percent funded. Where is your starting point? David, just some other thoughts on that.

David Whann 48:23

I think you hit pretty much all of my thoughts on on the nose. When it comes to the reserve study, look at the immediate projects, especially for, as Robert mentioned, an older reserve study, it may have said, or let’s say it was done in 2018 and you’re looking at it now, and that was the most recent. Realistically, all of those costs are no longer applicable by probably a very large margin, and that is not the reserve study provider’s fault because of the massive amount of inflation that really began covid and post covid due to everything that has occurred, natural disaster wise, covid, supply chain issues, etc. So if you don’t have a current reserve study, that’s the first thing that you need to determine if you do have a current reserve study, the component list, immediate projects where you stand, and Robert touched on all that very eloquently.

Paige Daniels 49:24

Okay, great. We have time for one final question. We will be answering all these questions in a webinar outline, but final question here, the question of price estimates, is significant. I often find that bids are higher than the reserve study estimates. Should the default inflation rate be more than the standard 3% it’s a long topic.

Robert Nordlund 49:44

Yeah, we spent an entire webinar on that one question, but make sure you’re separating two things. We said it in the last answer. How old is your reserve study? If your reserve study is two years old, no doubt. The prices today are going to be much higher than stated in a two year old reserve study. So look at that. So the current cost is what’s significant. It is dangerous to put a higher inflation rate into a reserve plan, because if you look back in the history of this country, inflation has for the last two or three decades been stable in the, or, I should say, average in the, what, David two and a half, 3% range. So it’s been much higher the last couple of years. I have zero expectation inflation will be six to 10% for the next 30 years. So I do not put six to 10% inflation in a reserve plan. I want to make sure my current costs are there. But I believe in this country, and I believe the powers in place in the government and the Federal Reserve and all that kind of thing, they’re going to bring inflation down to a healthy level. So we planned for inflation at a reasonable United States of America rate. But we got to get those current costs

David Whann 51:12

anchored, and we are in a immediate time of high inflation. I look at the data that we most recently went about and even on the past 30 year average for CPI, we were about two and a half percent. We look at other things such as construction cost indexes as well, and overall, the change per year on that typically hits around the three to 4% range. But it’s not a 30 year mark that they began tracking within. And so as you look out farther and farther, the percentage on average, goes lower and lower. Now, if we continue in this, let’s say another five years, or another three years, then we may consider shifting up by a quarter or half of a percentage point. But you don’t want to be drastic, as Robert said, is it has a 30 year effect. So when you talk about the difference of 3% compounded every year for 30 years, and 4% compounded every year over 30 years, that’s a major effect, and getting your ups your reserve study updated is the easiest way to keep those cost estimates exact, or as exact as they can be. Even within our profession, we receive bids to review the scope of work and the cost for multiple clients, and they may have a 40% variance high and low, between the lowest bidder and the highest bidder, and it’s just so extreme at this point, the unfortunate truth is that the work costs whatever someone is willing to pay or, similar to real estate, a home, only home is valued about what someone is willing to pay for it. If someone doesn’t buy it, in 30 days, that value goes down, and you start to see the averages go down when there’s desk demand. So if there’s more very high demand for said work, a couple of key ones that we know of, pools, elevators, roofing and in demand materials for construction purposes, the inflation on those are going to be higher because of the demand related to them. So anyways, I went on my my TED talk. I apologize,

Robert Nordlund 53:25

that’s a preview of a future webinar on exactly that topic.

Paige Daniels 53:28

Some of the components shown as needing to be replaced next year are disputed by some homeowners, and they use this as a reason to not trust the experts and therefore not follow the reserve allocation recommendations. How do we handle this?

Robert Nordlund 53:44

David, are we recording? Can we say some nasty things here?

David Whann 53:48

Well, it’s a fun argument. It’s one that is frequent. I guess you could say, in this profession, if you want, I can take lead on this one. Robert, yeah, it’s within and really, I want to preface this with a reference to the national reserve study standards and how we, in our framework, see reserve components when we go to set a remaining useful life on an item. One major consideration may be the actual replacement interval, but it may also incorporate consideration of at what point we feel the association should be financial, financially capable of complete, completing the project. So in your example, let’s say an AC system is already 14 years old, and in that region, we’ve assigned a 15 year life, which means it will be coming due soon. We’ve certainly had homeowners argue that there’s no issues. Nothing is wrong with it. It’s still running. And we certainly understand those things and take those into account. But with mechanical systems we may have, we have a set useful life for a reason, and so I. Liken it to driving a 2003 Toyota Camry with 400,000 miles. It runs great. I haven’t had any issues up to this point, but I do get in the car and I turn the key and I hope it starts every morning, and if it doesn’t, I have to buy a new car. So it’s similar in those types of considerations that it may very well last longer than that, 15 years in this example, but it may be ready. Yes, you need to be financially ready. The other opportunity is to go talk to the industry professional. If there are arguments against what the reserve study has shown we do in our profession, go and inspect a property. It’s a visual inspection, and we’re doing it as a snapshot. We don’t have all of the contextual details of the history and the maintenance leading up to it, unless it was provided to us as part of this engagement. So if there’s valid arguments as to why it should last longer, we would certainly, as reserve professionals, be open to hearing those out. But a lot of times, the disconnect is because of the lack of information we may have if a homeowners are speaking out on this and basically using the it’s my opinion, what should matter is the professional opinion. And if a professional say, your associations, vendor comes back and says, Yeah, I do think it could last three or four more years, and you’re showing a zero, we’d be happy to adjust it at that point and find a common ground among everybody. But just general opinions don’t carry as much weight. I should say, Robert, would you agree with

Robert Nordlund 56:36

that? Well, you’ve given me enough time for my emotions to calm down. It’s the board’s job to lead, and it’s the homeowner’s job to follow, and the board’s job is not to make everyone happy. The board’s job is to run the association, and sometimes the board needs to say, thank you very much. I’ve heard you, but we need to be funding this much in reserves next. So it sometimes just comes right down to that.

Paige Daniels 57:09

Paige, all right, we had quite a few questions about landscaping. Come in already. What is your thought or opinion on large landscaping, slash arborist items?

Robert Nordlund 57:19

Yeah, think about the three part test. Is it common area? Let’s presume Yes. Is it reasonably predictable? Well, gee, trim your trees every third year or something like that. Maybe you replant the color in the front of the association every fifth year. I don’t know. The bushes start to get ugly after 20 years, there are cycles. So yes, association responsibility, reasonably predictable, significant cost. When you look at what plants cost nowadays, you could easily be spending five figures on this kind of stuff. So speak to your landscaper, actually speak to your reserves aid provider. It’s a legitimate reserve expense in most cases, because it passes that three part test.

David Whann 58:06

The only asterisk I’ll provide to that is that many clients opt or choose to exclude it from their reserves on the basis that they’re going to do as needed projects here and there, or they have some alternate fund, even if it’s the operating surplus that they may pull from to do these projects. I wouldn’t say you can make an argument both ways, which, if it’s not in your reserve study, the likely answer, if you ask your reserve study provider, is that it can be is difficult to project replacement costs and intervals for a wide range of items. So as Robert mentioned, tree trimming is typically a set interval, which helps the case for adding it to reserves. Replacement of a certain number of trees may be different because of the outside factor. So you know, is there disease that’s spreading throughout them that’s causing a need for replacement? How frequent are storm events that cause major removal and replacement needs. Those are all things that you can argue both ways. Within the reserve study standards, it may be predictable, and you can establish a fund because you believe it is, or you could argue the opposite and say it’s it’s something that we want to tackle as needed, or it’s too unpredictable at this time to fund either way. Definitely talk with your reserve study provider.

Paige Daniels 59:26

All right, what is the best way to present the current study to owners that is informative and concise?

Robert Nordlund 59:33

Oh, I like that one. A very good question. Yeah, I kind of led with it. There’s three parts to a reserve site. There’s the components. So it’s a list of your common area projects. There’s the evaluation of your starting point, which is your percent funded. And you can say, we are 72% funded. And some people may not know really what that means, so you may want to provide the framework 70% and above. Is good. 30 to 70% is fair, zero to 30% is poor, because if your child comes home with a 71 on their chemistry test, that’s a good point. Some some parents may be happy, some parents may be sad. David, I think your parents and my parents were both pretty darn sad if we came home with a 71 but 71% funded is a good place, reserve wise. And third is your funding plan, and what’s recommended compared to what you have been doing. So what’s the gap that you need to change? That’s pretty much the main things you need to know, and you can absorb that, or you can communicate that in five or 10 minutes.

Paige Daniels 1:00:45

Are there restrictions on what can be reserved for? Absolutely, go back to

David Whann 1:00:49

components. Yes, I would say that we will Hoa, or I will push again to speak on this within the three part test that has been explained already. The restrictions are especially outside of that three part test items that are new installations, so a new installation of a pickle ball court that didn’t exist before, or new installation of, say, a camera or surveillance system that was never existing previous on that property. New installations are not part of reserves. That is a Hangouts, right? That’s a Capital Improvement Fund. Reserves are for ongoing maintenance, repair, replacement of existing items on their property. Others are typically infrastructure related or non accessible to the reserve study provider. So within our scope, we are visual inspectors only. We can only provide an opinion on what we see. So a lot of times, foundations, structural load bearing, walls, these are all things that within the scope of a reserve study we’re not able to assessed, assess, so you will see that in your reserve study as a non item or non funded item. And so Robert less, you have a point unless, unless, which is actually you know where we had an update to the reserve study standards in 2023 they there are recommendations or can be within reserves for professional inspections to clarify those items. And so while there are restrictions and limitations in what we can provide, a lot of times, we’re going to provide guidance to you so that you can go get the information you need to incorporate what’s needed into reserves. Some items may never need replacement, because they may have what’s referred to as an indefinite or indeterminate life. Hopefully you’re never going to have to replace the foundation of your 40 story high rise. If you did, that would probably result in reconstruction of the building entirely. And so those are the things that we take a look at, and we would otherwise exclude or restrict from funding,

Robert Nordlund 1:03:08

yeah, but if it’s deteriorating, we’re going to include it in the reserve site. And if your experts can give us some insights, your plumber, your roofer, your HVAC expert, your elevator expert, that kind of stuff. We gather that information. We love getting that information so we can plug it into the budget. What bothers me the most is when there is a state that has a specific list of items and says you must reserve for these things and then associations in that state fund for only those things. That’s when you have a real gap. So think about that three part test. Speak to your reserve study provider. See it in the Reserve component list fund for what’s deteriorating, because you want to be prepared.

David Whann 1:03:58

I’m going to add one example to that which I’m wearing. This isn’t a Florida webinar, so I’m not going to harp on it too much, but when they came out with the legislation, we found it crazy, or at least I personally did, that somehow all of these list items were included and elevators were somehow just left off of the major SIRs list as a major, you know, typically, major mechanical system within a building that provides potential compliance within that state, but that was one of those major big ticket items that didn’t get put into legislation. So it gets overlooked if you’re only funding sirs,

Robert Nordlund 1:04:33

yeah, and for Mrs. Johnson on the 13th floor, elevator is life safety.

Paige Daniels 1:04:38

Are there any rules or requirements about putting some of your reserve account investing into a shorter term CD to get a better interest rate, for example, say, 50% of the reserve ballots.

Robert Nordlund 1:04:49

Actually, this is going to be a plug. We’re going to have a webinar, I think it’s next week, actually, with an investment expert, and we’re going to talk about some of these kinds of things. But we want you to maximize your interest. Earning every dollar you get from the bank is one less dollar you need to ask for from your homeowners. It’s a wonderful thing to get 4% on your reserves instead of 1% it’s wonderful. It’s not wonderful to put your reserves at risk of declining in value because your reserves, David said it a little bit ago, it’s for maintaining and replacing your existing projects. When that roof is going to fail, you need your money then, and so you can’t be crossing your fingers and hoping that the stock market continues to go up, because everything that goes up comes down. So yes, maximize your reserve interest. Do it in a safe investment. We have a webinar next week with an investment counselor. We’ll talk about more of those kinds of things.

David Whann 1:05:57

David, no, I agree with that, just be safe and don’t over expose yourselves. And I don’t want to over speak, because realistically, I find this to be a financial investment, a form of financial investment advice. And we’re not those type of advisors where we can step in and your project manager or reserve study provider can step in, is they can say, these are the expected costs within, you know, the reserve study. And so you should strategically plan, which Robert mentioned on his slide earlier, funding plan. Strategy is a part of the reserve study, and they can assist in creating that strategy to the best of their ability, which may involve, if you don’t have any immediate projects coming up, it may not be an outlandish action to fund or put 50% of your reserves into a CD if you don’t need them. Sure?

Robert Nordlund 1:06:54

Yeah, the danger is, when you have a big elevator project next year, and you put 75% of your reserves in a five year CD, and you’re like, holy moly, now we have no liquid cash to be able to pay the elevator guy, so you need to do prudent investing in light of your projected expenses. And as David said, A you a financial advisor that’s familiar with reserves and community associations, first thing they should ask for from you is, Okay, show me your reserve study, because that’s their

Paige Daniels 1:07:33

plan. All right, do you have recommendations for convincing small condo boards that reserve studies are necessary? Many defer maintenance, thinking short term, that they will be saving money.

David Whann 1:07:44

Robert, I can see you boiling again. Doesn’t

Robert Nordlund 1:07:49

matter on site. I was I was thinking, you’re talking about small board or a small Association. And whether it’s small association or a large Association, we do see the same things. It’s human factors. Every Association out there has a tight budget. No doubt you’re all nonprofits. We get that, and it is so human nature to want to not spend the money this year. Maybe we’ll just repair it, but that just leads into more repairs. And you’re you end up band aiding. I’ve heard the term band aiding bullet wounds, and you need to spend your money wisely and at the right time, you need to replace the thing, and then, you know, wipe your forehead, and you’ve got 10 or 20 years where it’s going to serve effectively. So talk to your reserves day provider, the statistics industry wide are that when you replace at the right time, it saves you money in the long run, it’s just the right thing to do. So don’t be penny wise and pound foolish.

David Whann 1:08:58

The clear explanation that I have, or clear sentence that I’ve always held to is that reserve studies are a form of information, and whether you think you’re saving money or not by deferring reserve allocations or reserve funding, wouldn’t you like to know what’s coming down the way? Three, 510, 15 years, we’ve had associations that have willingly chosen, or at least clients of mine, that have willingly chosen not to fund anything. And really for us, the benefit of the product is still there. Knowing that they’re not funding anything, they should be very aware of how many special assessments they’re going to have, probably after a certain point, year after year after year, and operationally, we don’t, or from our standpoint, we don’t necessarily agree with that approach, but that’s also not our decision to make for the client. Our job is to provide good data and good information so that you as the board of directors. Directors, and really related the property managers that are assisting the board of directors to make good decisions for the betterment of the community and maintenance of that community in a proactive way.

Paige Daniels 1:10:11

I just analyzed a study that was front loaded with a high percent funded for next five years, and then drops gradually over time, dipping below 50% in 10 years. I assume reserve studies are against this practice.

Robert Nordlund 1:10:24

Sometimes that’s literally what happens when you prepare for a large project. I think about it like boxing. You You’re there, and sometimes you need to take a big punch. That’s an elevator project, a roof project, an asphalt project, that’s going to knock you back, but you get up and then you’ve got five years, or 10 years or whatever, until the next big punch. So sometimes your reserve fund will be a saw tooth. It doesn’t if you look at the overall plan, probably one of the reasons you got to a strong place so that you could absorb a big punch. So I tend to see something like that more from a multi year perspective. I’m not bothered if it bounces down for a year.

David Whann 1:11:15

Would you mind marking this one answered? I wanted to take a look at that question, but I can’t find it over

Paige Daniels 1:11:21

here. Yep, will do all right. We are a commercial condominium association built in the 1980s without reserves. We now have reserves. We need to say, for new large cost projects like drainage work and block walls, can we add these projects to reserves

David Whann 1:11:37

that passes a three part test? Those are very specific situations. First thought is yes, and second part is, as Robert said, has to pass that three part test. All

Paige Daniels 1:11:48

right, our board has suggested having a percentage of our reserve study put aside for weather related issues as part of our process. Is that acceptable? You’re talking

Robert Nordlund 1:11:59

about maybe wind storm cleanup or snow removal, Paige, you think it’s, yeah, that’s what they’re talking

Paige Daniels 1:12:07

about, hurricane damage, probably anything along those lines.

Robert Nordlund 1:12:11

There’s nothing wrong with having a contingency fund on the side that is available for the board at its discretion. I wouldn’t take it out of reserves, because everything, every dollar that goes into reserves, effectively, is earmarked for repairing or replacing something. And if you take it out to put it on the side, then it’s not there for the roof, it’s not there for the asphalt, it’s not there for what it’s needed. So we have many associations that have their own discretionary extra fund on the side, not a bad

David Whann 1:12:42

idea. I would also state there have been conversations or in the arguments to the three part test that if you clarify what frequency that it could be put in, and there is an argument to that. But as Robert stated, it’s probably best to go into a discretionary fund that has a bit more flexibility and freedom outside of reserves, since you are funding it anyways, it would probably be better in that bucket, so to speak, where reserves are intended for direct, most often specific projects, and the scope of a cleanup can be so widely, varying from say, one hurricane To the next, or one snow storm to the next, that it becomes a lot more, lot more or a lot harder to call it, reasonably anticipated,

Paige Daniels 1:13:32

is the percent funded, or account funding and account balance more important.

Robert Nordlund 1:13:37

Percent funded. I used to do a webinar with another Rs, big guy, well over six feet and maybe 100 pounds bigger than me. And I’m, you don’t know I’m, I’m not a big guy. So we would stand up in front and we’d do this presentation, and we would joke about how the other gentleman’s jacket wouldn’t fit me. My jacket wouldn’t fit him. So it doesn’t matter that I have a very nice blue blazer or he has a very nice blue blazer. It’s got to fit. And so it’s not, do I have a good blue, nice blue blazer or not, the question is, does what I have fit me so percent funded is more important than cash in the bank?

David Whann 1:14:28

And I’ll give one more example before we move on from this to a lot of people. A million dollars sounds like a large sum of money, and it is, except if you are staring down the barrel of a $1.5 million elevator modernization project, followed by a $3 million roof replacement and building painting project, etc, so on. Then that dollar amount doesn’t matter, because it sounds like a lot of money, but in the context of what needs to be done, it’s not at all. It’s actually a. Very minute amount of money, and you need five times that to fund the projects coming due. Percent funded will show that where you know the ongoing deterioration may be valued at, say, $10 million $1 million is not a lot in the form of percent funded, because that’s 10% funded, and we know that’s a very high risk of special assessment moving forward. So looking at it as $1 value is only looking at it at the surface without any further context.

Paige Daniels 1:15:28

All right, per reserve study standards, there are components that should be included in a reserve study that do not qualify as a capital expense. Per IRS regulations, is there a recommendation on how the HOA should handle these rule differences,

Robert Nordlund 1:15:41

yes, fund your reserves per national reserve study standards and pay your taxes per IRS standards.

David Whann 1:15:47

I’ll leave to that. I got enough on that.

Paige Daniels 1:15:50

All right, how is a reserve study a plan? If the issue is years of underfunding and delaying maintenance, well,

Robert Nordlund 1:15:58

it’s because prior boards didn’t plan and now you’re trying to be serious about things. If you’re not taking care of your health, there will come a year in your life where you realize I have a current health problem, I can no longer avoid the issue. Well, if you would have taken years to care more for your health, you would not be in this crisis. Same with the building. Maybe prior boards didn’t care. They didn’t fund reserves, they didn’t do reserves. They just floated downstream. Now you’re in a jam. So now you need to plan, and arguably, truth is, you will be in catch up mode for a while, five or 10 years. Maybe David

David Whann 1:16:47

could be the entire 30 year plan. We’ve had funding plans that we provide, provided clients that the very same ones that say we’re just going to special assess every year, and then you get a new wave of owners that are tired of that approach, and don’t want to pay for the past discretions forever. And they set a proactive plan that say over the 30 year period will be a considered consistent, steady increase of percent funded to eventually get there. It’s it’s tough to pay for those past transgressions, and ultimately, the frustration is only with past or should only be with past membership. It shouldn’t be with the existing board that’s trying to do the right thing, or the property manager that’s also trying to maybe advocate for funding the reserves properly, because it it makes everybody’s lives easier, and should, over time, maintain or promote high property values, improve property values at that community as you’re conducting proactive maintenance, it’ll also save money when you’re not doing a bunch of emergency fixes, because you don’t have any any money, and you didn’t do that proactive repair, That could have prolonged the life another couple of years. And so I think that’s where it now.

Paige Daniels 1:18:07

All right, if our irrigation system has a major break and it is an asset in our reserve study, if the cost exceeds 1% of our budget, can I use the reserve money to fix it?

David Whann 1:18:18

On the surface, it sounds like Yeah. It seems like yes, if it’s a reserve component, yes,

Robert Nordlund 1:18:22

yeah, either way, I reach out to your reserve. Say professional, they probably know. They’ve probably been there, they’ve probably seen the asset they’re looking at the reserve. Say they know your situation. Lean on them, but both David and I lean towards Yes, great.

Paige Daniels 1:18:40

We have time for one final question here as a reminder, any unanswered questions will be answered in the webinar outline. All right. Final question here, we have received bids for some reserve items that are significantly lower than the replacement costs listed in the reserve study. What should we do if this trend continues and we consistently find we can replace items for less than what we have budgeted. Aren’t we at risk for over funding our reserves in the long run, each year, the reserves are recommended to be increased by 3% to keep up with inflation.

David Whann 1:19:10

Yeah, I’ll take that one on ultimately, this can and will likely occur for many associations throughout the country. Our cost estimates are regionally and locationally driven, so we do our best to track that information, but in any given case where you receive bids, you’re probably going to receive a pretty wide spread. The one caution that I would look to is the quality of the vendor, the quality of the material or system that is being replaced in the scope of the project. And one of the key examples I can give is say an elevator modernization, hydraulic elevators for that modernization piece can often include or exclude the. What’s known as the pump unit. It’s the mechanicals or mechanical pieces of the elevator system. If that pump unit is excluded, and you receive a bid, it’s still going to say modernization, but it could be 30, $40,000 less than what we would fund in the reserves for a full modernization, which includes both the controls and the pump unit, so there is some variance in scope of what can be expected or is funded in a reserve study, and what you may receive a bid on. And so that is the first caution that I would advise is to make sure you’re comparing apples to apples and not apples to oranges. Secondly, you could if that was the case for every component through throughout time, but when you conduct your next reserve study, update that reserve study provider should ask for that history, and those components should be updated accordingly to the price you are paying, or they should provide a description or explanation as to why they believe that cost is not where it should be, or maybe they believe you’re just getting a great break. All of those things are possible.

Robert Nordlund 1:21:13

Yeah, I like what David said, The our theme here at Association reserves, and David will know it when I say it, make sure every reserve study is better than the one before. And so you’re always tuning and re tuning. What have we learned about the client? What have we learned from their cost history? What prices can we adjust? How can we adjust the life expectancies, all these kinds of things. So it’s a matter of tuning and re tuning. If you’re finding the prices are lower, then, yeah, maybe we overestimated what things are costing in your local geographic area. But I want to caution you, just like David said, I had a oceanfront client, and I was trying to remember, so I can’t remember if it was like Miami or Ocean City, Maryland, or Santa Monica, but I remember oceanfront, and they were getting bids on their cooling tower that was on the roof of their high rise. And one bid was like 250,001 bid was like 175,000 that’s a lot of money. And I called the two providers said, you know what’s what’s the difference? I found out that the higher cost one was made of stainless steel, the lower cost one was not. Higher cost, one was going to last 20 years. Lower cost one was going to last maybe 10 years. So you got to see what you’re really buying, the asset really needs to be well suited for its location, and sometimes that makes a big difference in the cost.

David Whann 1:22:49

Maybe that’s an idea for a webinar moving forward is kind of digging into some of the variances that we see. I mean, I can I, as you’ve gone through, I’ve bought asphalt, the difference in depth for mill and overlay for pool resurfacing, whether they use Diamond Bright versus pebble tech versus some other gunite material. Those all have different price points. Really the sear and efficiency levels of AC systems, and whether they’re coastal equipped or not, they all have significantly varying prices as well. So it’s a very interesting topic, and hopefully the case is not that it’s abundantly over fund, over estimated on all of their components, but if that is the case, it is something to provide to the reserve study provider, I’m sure they’d be happy to update all those components and learn something along the way that maybe we’re overshooting in that specific area,

Robert Nordlund 1:23:50

and for all clients and prospects, basically our audience listening here, I want you to understand that when we look at what the prices are nowadays and we finish your reserve study, we wince when we see what we need to recommend that you set aside towards reserves. And if you can help us lower that number by saying, Hey, I think you’re overestimating our costs here in our metropolitan area, that’s going to help us, because we feel it’s not our money, but we know we’re giving it to the board, and the board is going to have pain recommending a higher reserve funding amount than is necessary. So yeah, help us do our job. Well, provide that information to it to us, communicate it. And we don’t want you to be underfunded. We want you to be well prepared.

Paige Daniels 1:24:42

All right, thank you both, Robert. I believe you have some closing remarks.

Robert Nordlund 1:24:46

Sure. I will get back to those. Okay. So in conclusion, the expenses are there. They’re driven by mother nature and Father Time. You only have a choice of how to pay. It’s not how. Much, but how it’s going to be budgeted funding or special assessments or loans, and there’s more to it. We want you to be effective in your role. Understand that real estate is expensive. You may need to pound that point hard many times throughout the year. Inflation is real, all these kinds of things, and use appropriate words we’re not setting aside for the future, because that sounds like someone else’s problem. What you’re doing is paying the ongoing cost of deterioration. Basically every month, you’re paying a little bit a little bit a little bit for what it costs to keep the place going the lights on, because you are indeed paying for the funding needs. You’re not contributing. It’s a bill, just any other bill. So set aside budget for that ongoing cost of deterioration, collect the funds, do your projects in a timely manner, and then regularly talk to your reserve study provider to make sure that you’re on track if you have a question, if you need it, tuned, if you need it, updated, all those kinds of things. I want to encourage you that reserves are a very significant part of your budget. What we see is reserve funding tends to be 15 to 40% of the typical associations budget. A real common number is somewhere around 25% and that’s what I’m showing here in the pie chart. And the nuance of that is just barely keeping your reserve fund cash positive or baseline funding, as David said earlier, that’s about 22% fund of average associations budget, so a little more margin to have your reserve fund be strong and insulate your homeowners from a special assessment. That’s money well spent. That’s where you get a lot of benefit. So budget to pay your bills, the bill of ongoing deterioration. You minimize special assessments, minimize deferred maintenance, you minimize those extra costs that your association from things piling up, and you maximize owner enjoyment. It’s a nice place to come home to. It looks sharp. It’s easy to be a board member there, because there’s money to get things done, and it’s nice because maximize property values. Two bedroom just sold for a record number. The homes there, the five bedroom unit, just sold for a record number. That’s great to be able to say at an annual meeting. So don’t focus on particular projects, a roof or asphalt, because some people care about this. They care about that, something. They don’t care about anything in the future, like the gentleman in this cartoon, focus on the ongoing cost of deterioration, because that’s what you’re trying to accomplish here. It’s a budgeting process. It’s not musical chairs, and we spoke about in a couple of the questions it may take a few years to get there. We want you to start on that road, and we are here to guide. You guys get to be the hero. You guys get to be the ones who reap the rewards from the higher property values. All we do is stand along on the side and say, this is the way forward. This is the way to stay in the middle of the trail. So we’re at the end of our time. Here we are Association reserves. You can find us at reserve study.com Paige said it earlier, so this may be the first time you’ve seen it in writing. We, two weeks ago, crossed 100,000 reserve studies. That’s a fun number. We’ve learned a lot from that, and we want to communicate those lessons learned to you more information on our website. There’s more information on YouTube, plenty of lessons like this, webinars like this. And we have a book, if you’re a reader. It’s called Understanding reserves. You can get it on Amazon for 2999 and we have this Uplanit online funding calculator. It’s a great little tool. We didn’t use it in our examples today because what we’re talking about had to do with more concepts, rather than this is how it works. But it’s there. It’s a cool little tool. You get your completed reserve study on this online tool, in addition to a PDF and so you get to play with some of the numbers. It’s a great tool and fun thing to have, and another resource for our board members. We have a weekly 30 minute podcast to encourage and equip you for the hard work you do for your associations. We have subject matter experts. We feature some board heroes. We talk about current events, lot of things that make you a little better equipped to handle the challenges of being a board member at a community association, you can find it on all major podcast platforms. It’s called HOA insights, common sense for common areas. Us, or you can watch it on YouTube or listen to it on the website, which is Hoa insights.org, and with that, I’ll turn the program back to Paige, who will have a few concluding remarks. Paige,

Paige Daniels 1:30:14

thank you Robert and thank you David. That concludes our webinar. If anyone is interested in a recorded version of this or any other webinar. You can search for them on YouTube or on the association reserves webinar page. If you enjoyed today’s session and would like to receive the association reserves newsletter or announcements of future webinars, please visit www dot reserve study.com and scroll down to the bottom of the page to sign up for the newsletter. As you exit this webinar, a survey will display. If you could help us out by completing that survey, we will be happy to email you an outline of the webinar. That outline will include answers to all the questions that our limited time didn’t allow for us to address, and those that we did address. I want to thank you all for attending. If you have any questions, or if there’s any way we can be of service to you, please don’t hesitate to contact us. Thank you again.

Robert Nordlund 1:30:58

Goodbye. Thank you Paige, thank you David, thank you everybody.

1:31:02

You.