Case Studies of Successful Reserve Planning

Robert Nordlund 00:07

Well, thank you, Kali and hello everyone. It’s my pleasure to be with you today, and today we’re going to be talking about case studies of successful reserve planning. And this was one of those programs that we created in response to you asking, Well, what does it look like for associations to do their reserve planning? What have you learned from it? What can we learn from it? And so this is a program. We’re going to have four different case studies. We’ve changed the name as a colleague mentioned, and it is indeed a little bit of following the client through the years. Sometimes it’s nurturing the client, sometimes it’s correcting the client. Because as you imagine, board members change, and the opinions you shared about are you aligned with the reserves day provider, you may feel one way, and your board members in a few years may have a different understanding or different set of priorities. And so things change at an association over the years. It may be the same roof, but it may be lead or the budget for that roof, the purse strings may be held by a number of different boards through the year. So going to walk you through a number of different case studies and show you a few things that you can pick up, hopefully to help you run your association a little more smoothly. And as I go through these case studies, I’ll reference a few different things. Percent funded is the strength of the reserve fund. It’s the comparison of reserve cash, how much you have to the deterioration at the association. So it’s a matter of, do you have enough cash to do the projects that you need to accomplish? So that’s percent funded. Deterioration rate is the rate at which your assets are deteriorating, and that’s independent of your funding. That’s a number that tells you how much you need to be setting aside to keep up with the ongoing deterioration, and then the funding plan, I’ll reference that. What are we going to recommend to the association? What remediation, if it was a doctor, what is the prescription they’re going to give to you to get you safely and successfully into the future? So let’s start with first one, first garage door villas, and to introduce the association. It’s a 21 unit suburban town home, three buildings, 34 years old. We’ve done their reserve, say, 13 times now over the years. So as you’re thinking about this, you’re thinking, Okay, not too big of a place, just three buildings, 34 years old. So they’ve been around. Maybe they’re on their second maybe approaching their third roof, you can kind of visualize what they have there. The issue here you don’t see they have some very expensive common area assets, and I’ll show you that. But politically and in control, they have one dominant board member. This board member has been in a position of power for a number of years. And I think many of you know what it’s like to have a board member that is almost to the point of being a bully, but this one dominant board member has focused on lowering reserve obligations. We have scuffled with each other over the years. Interestingly, they keep hiring us and we keep telling them what we believe to be the truth, what we see there about their roof, what we see about their asphalt, what we see about all their other things, and what we know about what costs. Our current costs are in the market, and current costs are a whole lot higher now than they were a few years ago. Anyway, this dominant board member wants to lower reserve obligations to increase their percent funded. And his primary rallying point has been he wants to remove the garage doors from the reserve study. I hear him, but garage doors are common area according to the governing documents, and we’ve always stood firm that the garage doors stay in they passed three part test for what a reserve component is. So we just did their most recent reserve study, and we learned something about them. And let me click over to our Uplanit software. It’s our online reserve calculator, and this is the kind of view that a portfolio manager would get listing all their properties, and I’ve set it up with our cases. Here for today, I’ll click on garage door villas, and you can see that we’ve done the number of reserve studies for them, and click over you plan it to see their assets. And this case was one that I was sensitive to because of the garage door issue. It used to be my client, and I’ve moved on and turned this over to another employee, and I saw garage doors as not funded, and I checked with the project manager on this one. I wanted to make sure that we were not. Being bullied, and the project manager said, Oh, they just updated their governing documents. They amended their governing documents and garage doors now personal responsibility of each owner. I was like, wow. Okay, well, good for you to follow the governing documents. And interesting that this board president felt so strongly about it that they amended their governing documents. So let me show you a little bit what this means to their association. We’ll click over to the recommendations page, and you can see that in their attempt to lower their costs by decreasing garage door expenses and increase their percent funded by one less thing to pay for. And you can see the garage doors here in the picture, they have lost sight of their overall objective. And their overall objective is to run a strong association with cash enough to do what they need to do. I’m going to click over here to tables and charts and show you the component significance. It’s basically the cost of a component divided by the useful life. That’s their average deterioration cost per year. Sum that all up, and for this place, it’s about 84,500 per year. I’m writing that down, 84 448, okay, now notice they have been budgeting their reserve funding at just under $3,000 per month. And to make the numbers easy, let’s call that $36,000 a year, so you can see that they’ve been significantly underfunding reserves these last few years, and that has a consequence. That consequence is exactly why they are only 13% funded at this time. So I take a deep breath there, because this kind of hurts, and let’s go over to components and see what really they’ve accomplished. Let’s go to building exteriors. Let’s edit the garage door line item. And, for argument’s sake, let’s restore the garage door line item. Let’s turn the funding on to Yes. Let’s call it a 15 year component. And let’s, for argument’s sake, just say it’s five years left, and we were budgeting garage doors at $1,800 a piece, times 21 garage doors is 3737 800 And so let’s restore garage doors. Bingo. They’re back into the reserve study. Let’s take a look with garage doors in you’ve seen that they don’t quite achieve 100% funding. With this funding plan, it’s going to take a little more cash. Well, how much more cash? You might say? Let’s go to component significance. Scroll down to building exteriors, 702, garage doors, and it’s about $2,520 per year. I don’t know how much it costs to amend their governing documents. I’m guessing 10 to $20,000 but all that to save $2,520 per year. And the question is, did they really save anything? Because the garage doors are still there. They’re still getting old. They still need to be replaced. Yet instead of each owner getting it done for $1,800 through their reserve fund. Now each owner is going to have to take the time to find a garage door installation company schedule that installation make sure that the garage door complies with architectural standards, and those one at a time projects are probably going to cost about $2,500 a piece, so it’s going to be more expensive than if they would have got it done in economies of scale, all 21 at the same time. And in the meantime, there’s going to be some new garage doors and some old garage doors. And so it’s going to look what we call checkerboarded. It’s not going to have a nice, clean look. So this property was focusing on one little battle that they wanted to fight, and they lost track of their overall objective to fund what needed to be funded. And so I’m going to click back to the

Robert Nordlund 09:35

PowerPoint here, and let’s look at lessons learned. Okay, lessons learned is, keep your eye on the ball. Don’t major in the minors. We’re talking about just garage doors here. They still need to be replaced. Yes, you may have slightly reduced your reserve funding obligation by eliminating them, but they’re still deteriorating, and they’re still going to need to be replaced. Now they’re going to be more. Expensive to each of those 21 homeowners when they do them by themselves. And my son is a Navy fighter pilot. He tells me, when they do their dog fighting exercises, the rule is, lose sight, lose the fight. And I think this association here, we’ve been working with them through the years. They’ve been so distracted on their own personal agenda that they are losing sight of what their main responsibility is. So this year, we had to recommend a special assessment and significantly higher reserve funding than what they have been doing, because we need to guide them forward successfully. And so that’s been an interesting situation with what we call garage door villas. Okay, let’s move to forgetful villas. What can you learn from forgetful villas? Well, they’re an 89 unit subron townhome, 13 buildings. They’re 52 years old. There are associations out there that are getting that old, and we’ve done 11 reserve studies for them through the years. And what’s interesting is there’s been big swings in policy from report to report, and we need to recommend in response to that. And let me show you what we’re talking about here. The last report, the prior reserve study, they were a little over 300% funded, so we designed a funding plan to intentionally underfund reserves, so they would gradually reduce their reserve fund strength and surplus down to about the 100% range. And the way they were going to do that was through a nice, smooth and stable funding plan that increased gradually over the years. All right, so we get to this last reserve study. The interval was five years, and that itself allowed a lot of things to happen. The deterioration rate, the annual deterioration rate in the prior reserve study, was 40,000 little over $40,000 per year. And the current reserve study, it’s almost triple, and you wonder what the heck happened? And that’s exactly what I thought. This used to be a client in my portfolio. Wanted to make sure my project managers were taking good care of it. They weren’t having a Type, Type graphical error in something. And so again, let’s dive into this property and see what the heck is going on. So let’s step away from garage door villas. Let’s go to forgetful villas. What we learn here is two things. Number one, remember I showed a funding plan last time that we recommended gradual increases in reserve funding over the years. Well, turns out they forgot to increase their reserve funding each year. So they were funding with a five year old number. And remember, they were 300% funded, and we designed a funding plan that was to intentionally underfund them, to allow them to kind of burn off that surplus. Well, they spent a bunch of money on this and that and the other thing, and so they have a little less cash than expected. But most significantly, they made a policy change. They thought their landscape maintenance contract was very expensive, they found an alternative that was a whole lot cheaper, and so they changed landscape maintenance companies. Turns out, though, the new landscape maintenance company doesn’t touch trees, and you’ll notice here that tree trimming is $100,000 every five years. So that’s 20 grand a year. So that’s a lot of cash just from tree trimming that now they’re effectively paying that $20,000 per year from reserves. It may look to them that they’re saving $20,000 on that landscape maintenance project. Yippee, but they’re now just paying it from reserve. So that was effectively to the homeowner. It was a wash. Just less money paid from operating, more money paid from reserves. The other thing is, they found that the driveways are so old now that they need significant repairs, and they’re going to need to start doing it on every 10 year basis. They got legal opinion, and driveways are common area, so $90,000 every 10 years. That’s nine grand a year. You can start seeing how this all adds up, and then what has happened over the last five years, significant inflation. We all know that. So they’re building painting just about doubled. Their cost to resurface the pool just about doubled, and the cost to resurface the tennis court just about doubled. So while they were under funding, their costs went way up, and they added one significant. Significant line item to the Reserve component list, and they had minor tree trimming, but essentially they added this entire tree trimming line item to the component list. So like it’s a whole different situation now, and let me show you what their funding plan looks like at this point in time, because of how they’ve added obligations, costs to the reserve fund, they’re down to just a little over 100% funded, which means they don’t have a real surplus to be burning off. So they were funding 2750, a year from the past, when they were intentionally underfunding with our guidance. And now look, they’ve got to be funding their reserves at about 7450, so about $5,000 more per month. That’s a significant increase. So there’s a real consequence to making policy changes. There’s a real consequence to not following the reserve plan as laid out. They weren’t increasing their reserve funding each year as they were supposed to. And so let’s get back to the PowerPoint here. This is their situation, and what have we learned? Well, everything changes over time. The costs change, the conditions, change the cash balance, change. We also learned the board changed who does their landscape maintenance, and that the capabilities of that landscape maintenance company are less than before. That added costs over to the reserve fund. So there’s a whole lot of things that change. We can’t get stuck in the past, and that’s why National Reserve site standards recommend a with site visit update every third year now, because it protects you and your association from getting so far behind. So that’s forgetful villas. Let’s move on to procrastinate point. And we named it this way because of their style of running the association. This place, 167 unit metropolitan, five story condo. They have a lot of assets there. It’s a great place. They have five stories residential, two stories underneath underground parking. Nice location, right next to mass transit. They have an exercise room, nice exercise gym. They have a golf practice facility. They have a rec room with a piano and an organ. They do a lot of group activities. There a lot going on. Yet it is 45 years old. There’s a lot of those people that are kind of stuck in their ways. A lot of older residents. We’ve done 33 reserves days for them over the years. We’re a 38 year old company, so they’ve hired us almost every year of our existence to update their reserve site. And they are very cost conscious. When I would go there to do their wish, I visit update, I would see faded carpet. I would see the walkway decks outside the koi pond worn through, thinking you guys have the cash to do this. Why aren’t you doing it? And they would say to me, well, we don’t want to spend the money. People you’re starting to look run down your reserves are there to spend, not to hoard. Okay, so let’s pop over, and I want to show you something about this property. So let’s go back and look at you planet dashboard. And we’re going to procrastinate point, look at you planet again, series of reserve sites through the years, and we’re counseling and guiding, and counseling and guiding lots of assets, the courtyard, walkway fencing around that surveillance system, normal things you would see in a mid rise, hallway carpet, lobby carpet, but you start to see here, hallway carpet, remaining life of zero, stairwell carpet at zero, trash chute doors at zero the boilers. They replaced one of their four boilers. They’ve got three that are limping along. They’re repairing those boilers. Starting to get the idea here look at the kitchen, refurbish Sonia room, elevator, lobby walls, hallway walls, a lot of zero remaining user life. These people are just plain slow to execute their repair and replace projects. What’s the result? Let me show you this. We have a chart here

Robert Nordlund 19:35

that allows them to recreate what we call an executive summary, and that chart can show some highlights, and I’ve chosen the format where it highlights all the zero remaining useful life components, and look, as I scroll down, how many of their components have a zero remaining useful life you don’t have. Read them all, you can just see that it’s probably a little over half of their components have a zero remaining life. They are just slow to execute the projects. Now we’re recommending at this point in time, all those delays have just meant that they have a whole lot of projects stacked up this year. They should have been spread over the last five or 10 years, but they’ve stacked them up, and right now they just don’t have the cash to do them all, because they’ve been under funding their reserves, they’ve been nudging our recommended number down, and so we need to recommend $1,000 per unit special assessment, just so they have enough cash to execute this backlog of projects. So let’s get back to the PowerPoint. This is procrastinate villas or procrastinate point. What did we learn? Time catches up to you. You can delay projects, but they don’t go away. You can’t beat or fool Mother Nature or father time. If you think you’re under reserving because you’re not spending money, remember you’re not saving the money. Those projects still need to get done all those years of under reserving, but they’ve been doing thinking that because I’m not spending it, I can save it. They’re just now behind. Kind of gonna cost them a special assessment. Let’s get to waterfront overlook. This is another interesting one, different from the three others in this webinar here today, because it’s a 75 unit. It’s a saltwater waterfront, right on a harbor four story, so no beachfront. They have a dock facility. They have a big waterfront deck. It’s a nice outdoor environment there. They have a nice pool in that waterfront deck. They have a lot of iron work overlooking on all their balconies. And so you’re thinking, hopefully iron work in a salt air environment. They’re going to need to repaint it every other year. But it indeed is 58, years old. They’ve got a lot of, you know, hallways, ironwork, hot water system, fire alarm system. This is their first ever reserve. Say they made a guess, and they had been funding their reserves at about 100 to $150,000 per year. Okay, that was a guess, and good for them. Let me show you something real quick, and I’m gonna come back to this page. So let’s go to the you planet, click over to waterfront, go to you planet, and I want to show you what their deterioration rate is. Okay, here’s all their components. Remember, they had guessed at about $150,000 per year. Well, they’re all their assets are deteriorating at the rate of about a little over $400,000 per year. And it’s almost slap your head like Oh no. So indeed, this place is in trouble, and in trouble for a couple of reasons, and a couple of reasons are they are sick and tired of special assessments they want now to budget for stability, we’re going to have to recommend a whole lot more reserve funding to keep up with everything they have there that makes it a nice place to live, but it is expensive, and they are also located in one of the few states where they are required to fund for the reserve, say recommendations. So reserve studies are now required in their state, and they are now required to fund for the reserve say recommendations. So they reached out to us. We’re going to provide budget stability, no more guessing, and if we can get them to follow our recommendations, which they are now bound to do, they can say goodbye to these unsettling special assessments. Let’s pop back to you plan it and see what we can see here. A lot of components, and you’re seeing some really big ones, and I’ll show you in a different view here, their component details. So building exteriors, the metal roof, they just did this a few years ago, 40 year life, or 32 years left. That was a $2 million project. They just modernize their elevators just a few years ago. 25 years, 21 years left, they spent the $350,000 on that. A lot of these big projects they have recently accomplished, and they’re tired of being special assessed. And here’s they their boat dock. It’s time to work on that, and it’s going to be about $1.7 million they did their pool deck a few years ago, $500,000 you can see money. It’s expensive here. And what they’re coming up on here is a 60 year realization that the pilings underneath their building. They need some significant remediation. Their bid on that is 2.6 million. And in addition, their fire alarm sprinkler system, they’re going to need to spend 80 grand to get that back up to working, you know, keep people alive, and then they’ll be fixing it every at the midpoint. So there’s a lot going on there. We had to recommend a big special assessment just to face all the big structural things. $5 million of projects at this place. They had 1.9 million. Where do we show that we

Robert Nordlund 25:46

showed that on a different page, they have like, $1.9 million now that sounds like a lot of money, until you realize that we have over $5 million in expenses this year. Now what we did, let me show you, when we let the numbers just run and we do a normal full funding recommendation, they’re going to have to go from about $150,000 a year of reserve funding to 540 so about $400,000 more per year. That started to feel like a little too much stress. In addition to this $3.9 million special assessment that was about 50 grand per unit, knowing that they’re in a state that is required to follow our instructions, we looked at their expense map and look at once they get through this year, they’ve got a few years until they have additional significant expenses, right? So they can, we call this some breathing years. So we don’t necessarily need them to start funding, ideally, right now. And so what we chose here was this, watch what I can do here. We got a full funding plan at about $540,000 per year. But knowing that they’re each going to pay a 50 grand special assessment, we wanted to do what we could to help them have success at their association. So we said, how about if we design a funding plan that starts at $250,000 okay, you think Robert that’s going to crash and burn, and indeed it does. But what if we step them up? And we call this an exercise plan, where we’re going to give them some significant steps for a few years? Let’s recalculate that so you can see down here, starting at $250,000 increasing at 25% 25% 25 percent, 25% 25% 25% and that’s a little high. So let’s back this down to four, and let’s tweak the we call this a secondary ramp. Let’s go up to maybe 3.5 not 23.5 3.5 let’s recalculate and bingo, this is much more palatable. We’ll give them a few years to lick their wounds from the $50,000 per unit special assessment. Start building their responsible level of reserve funding, and that way they’ll have enough for this project here and all their big projects in the future. And so case study here, what we learn? Get back to the PowerPoint. Lessons Learned. Owning real estate is expensive. This is a nice property. Their ongoing deterioration rate is little over $400,000 a we are able to tell them that you need to bridge the gap to the future with a big special assessment now, but we can buy a few years of time to get you up to where your reserve funding needs to be for five years, and that way you can recover from your personal special assessment. Assessments and be in five years, funny enough to take care of the property for the long term. So as my mom would say, there’s more than one way to skin a cat. In conclusion, what do we learn here? Well, owning real estate is expensive. There’s only so many ways I can say that typically, what we see among our clients is that reserve funding needs to be about 15 to 40% of their total assessments. Nice sweet spot in the middle is about 25% and if you’re going to make a guess, guess 25% of total assessments going to reserves waterfront. Overlook. They guessed low, and they’re suffering the consequences. So think of your reserve funding, just like an electric bill, something you have to pay every month. You’re using it up. You need to pay. It’s a little bit like sand going through an hourglass. You need the budget to pay the cost of ongoing deterioration, all your distractions, thinking about garage doors, all your forgetfulness, about forgetting to raise the assessments per your last reserve study, all your mistaken thinking at procrastinate point that if I don’t spend it, I don’t have to put it aside. It’s still deteriorating. Folks, you need to budget to pay the cost of ongoing deterioration, and I’m hoping that that’s some of the lessons you can learn here today. Understand and appreciate your associations, current annual cost of deterioration, that’s what you’re funding through reserves. That’s what’s going to get you successfully to the future. We’re going to guide you, encourage you, sometimes cajole you to ask the board members change as your priorities change, as you change your landscape maintenance contractor thinking you’re saving money here, we’re going to correct you and show you. Let’s get back on path here. And quite often, that’s exactly how we see ourselves guiding our association clients to a successful future. They wander a little bit off the path. We’re going to guide them forward. We’re going to get you forward to success. We don’t want you to fail and just be bumbling from special assessment to special assessment to special assessment. We’re going to guide you, and if you’re getting back to us or your other reserve study provider within every third year, we’re going to be able to correct you, get you back on path before you fall over too big of a cliff. And that brings me to the end of our comments here today, I want to encourage you that we have many more resources at reserve study.com our website, if you want to get a proposal from our company and scroll down to the bottom of any page and get on our email list getting a proposal. I was doing it naturally with my finger. You scroll to the top of a page and you can get a no cost proposal for your association. We have plenty of resources on the website and on YouTube videos like we’re recording this one, and for those of you who are readers, we have a nice, easy to read book understanding reserves. We try to make things really simple. It’s available on Amazon for 2999 you’ve seen me demonstrate you plan it. It’s a wonderful tool to help you feel like your reserve study is your own. You can see what happens when you guess that you don’t need to fund as much well. You can see that potentially you crash and burn. It’s nice and user friendly. All calculations are per National Reserve, say, standards. And we also have another resource for those of you who are listeners, maybe commuters. We have a weekly 30 minute podcast for board members. It’s called HOA insights, common sense for common areas. It’s more than reserves. It’s all about all topics having to do with running an association. It’s a podcast to encourage and equip board members just like you for the hard work you do leading your association. We have people talking about taking minutes how to minimize your insurance premiums. We interview some board member heroes, and they talk about what they’ve done at their association, we have different attorneys talking about different legislation, things going on, fascinating podcast, 30 minutes at a time on a weekly basis, great stuff. And that pretty much brings me to the end of what I have here today, my planned comments, and I’m going to turn the microphone over to Kali, who will coordinate a little bit of time we have here for your questions. How can I be of service to you? You.