Reserve Study “Road Map for Managers”

Co-Lee Grev 00:00

So thank you all, and I appreciate your patience while we work through that little technical glitch. Hopefully we’re all you can hear me well at this point. So starting with the basics, I presume you’ve all heard that having reserves is a good idea, but for most of our clients, and likely the associations you represent, the common sentiment is that we’ll fund them someday, just not today. The reality is that deterioration is real, expensive and ongoing. Mother Nature and Father Time are unstoppable forces. They’ve been deteriorating everything in their paths since the beginning of time. So as an association leader, you have to give up on the idea that you can avoid these expenses. They’re going to happen. Major components at your association are going to fail and need to be prepared for to be replaced. So your choice is not if you can avoid the expenses, but how to fund the expenses. And it boils down to choosing between unsettling or expensive special assessments and loans or budgeted funding. You need to get comfortable with the fact that owning real estate is expensive and the costs are just unavoidable. It’s like you see in this cartoon with a real estate agent trying to explain how the association that didn’t fund its reserves is a benefit. It’s an unappealing Association falling apart, but the dues are low because they aren’t wasting money funding reserves. In other words, you get what you pay for or don’t pay for. The board has the power and the duty to set the budget, to collect money and spend it to sustain the association. So the question is, if they’re doing their job right or not, and as board members, they’re charged by the governing documents, as fiduciaries, to do just that, set a budget to sustain the association. And remember, when homeowners purchased a home in the association, they committed to paying their fair share, maybe reluctantly, but when both parties do their job, the association stays well maintained. So there’s the thing called a reserve study. A reserve study gives its readers a sneak peek at the future so they can avoid being surprised by upcoming projects. They get to save money by doing projects on time, avoiding expensive deferred maintenance, collecting adequate reserves means owners don’t have to fear special assessments because everybody has paid their fair share over time, and funding reserves responsibly reduces board member liability because they’ve treated everyone fairly, and the property is well maintained, and that leads to maximized property values and a regular reserve study update meets local state requirements, and those reserve studies provide the necessary disclosures that are required in some state. Without a reserve study, you’re exposed to surprises. You think $250,000 is a lot of money. Think again, you’ve got a big $500,000 roof project that is likely going to occur in just two years. Now that $250,000 project looks pretty small, and when you’re unprepared, projects don’t get done on time, they end up getting more expensive, and add to that the problems created when your insurance company raises your premiums or fails to renew you because the property is deteriorated. And then, of course, there’s what we call the DS, disappointment, discouragement, dysfunction and deterioration. That’s what happens when deterioration is a result of what happens when we don’t take care of the property. Declining home values. Remember that cartoon that a moment ago destruct when the owners don’t think you are acting in their best interest and danger, as we learn when Champlain towers fell back in 2021 killing 20, I’m sorry, 98 residents. Thank

Robert Nordlund 03:58

you, Co-Lee for the introduction. Thanks for stepping in on last seconds. Notice and see if I can move forward successfully through this next portion of the webinar. It’s kind of fun today. This is a live program, folks. So in this section of the program, we’re going to completely skip talking about the laws in the 25 or so states that guide reserve studies or reserve disclosures. And that’s because an association does not prepare a reserve study, because what the law says in their state, associations need reserve planning to offset ongoing deterioration that’s driven by mother nature and Father Time that slide that you saw just a moment ago. So the deal is, if you prepare well, legal compliance will follow. You don’t have to worry about that. Now let’s talk about boards. This is the portion of the program Co-Lee was going to do, and she’ll do it this afternoon in the second session. And so she’s the pcam. She’s been doing this for years before she became a full time reserve, say provider. So the managers are the. Agent for the board, but it’s the board who makes decisions. What do we know about board members? Well, we know the theory. The theory is that boards are responsible to run the association successfully, fairly and in a financially sustainable manner, but the reality that we all know is that they’re all too often acting like their job is to keep assessments low, and of course, that’s going to sound familiar to you. That’s when the boards are pursuing that fool’s gold of keeping assessments low, acting selfishly, not acting in the best interest of the association, and following their budgeting responsibilities. They are choosing to not increase assessments, even though they have the power to do so. And of course, they’re volunteers, so they’re always tempted to minimize the time and energy they spend guiding the association forward. I know we have a lot of board members and homeowners here in the program today. I’m not trying to be mean, but that’s really the reality of our community, association industry. So we have board members almost by definition, because they’re volunteers. They’re working hard, trying to do their best, but they just have limited time, limited training, and that often leads them to not tackle courageous projects. So what do you do? We want to be on the team regularly reminding boards of their job. It helps them keep their eye on the ball. And let me give you a new tool for people who think that I don’t want my dues to go up, that’s going to cost me money. I want to let you know that doing the right thing is actually in a board member’s financial best interest. Now let me show you this next slide how funding reserves adequately makes money for everyone in the association. Now these are the results from our 2017 study that we did in a big section of Los Angeles, similar associations in a very consistent neighborhood, and we found that home prices on $1 per square foot basis were 12.6% higher in the associations with well funded reserves, and those are above 70% funded, and that means a strong reserve fund materially boosts home values, setting aside honestly hundreds of dollars per year in reserve funding maximizes the curb appeal that returns 1000s of dollars each year to the owners in maximize home value. So it’s not just the board members, but everyone there at the association enjoys the benefit of the place looking sharp and the home values maximize. It’s maybe what you might have guessed you’ve heard curb appeal is real, but now we have proof before we get any further. I want to make it clear that everything we’re talking about here today are national concepts based on national reserve safety standards established way back in 1998 most recently updated in 2023 we’re not just talking about the association reserves way in today’s program on those basics. Anytime you see this seal on a slide, you’ll know we’re talking about national reserve, say, standard basics. There’s three types of reserve studies. We want you to know what you’re working with. There’s a full reserve study on the top, and then two update products, a width site visit update and a no site visit update. So reserve studies come in three types, and the next thing to know is that a full reserve study typically only needs to be done once. That means the vast majority of reserve days performed in the US are the less expensive with site visit and no site visit updates. Best practice is to perform a Wyss site visit update every third year, and the no site visit updates are to be done in the in between years. And remember, both the update products are significantly less expensive than that first full reserve study engagement. So let’s focus on a Wyss visit update that you’re supposed to do every third year, I’m going to walk you through a client. There’s actually a client of mine here, and here’s what this all looks like. I picked a pretty simple 2023, reserve study for this property. I’m not sure how much you can really see, but it’s got 15 or 20 components here, and it’s a town home property, pretty simple. When we were there in 2023 when I was there in 2023 we saw a lot of deterioration. So we see a lot of projects stacked up in this first year, 86 grand worth. And what they actually chose to do, not too surprisingly, knowing what we know about board members, their choice was to defer most of those projects, and sometimes you say they kick the can down the road. What they did do was replace the spa furniture. They trim the trees, and they they really liked their spa there, and so they moved the spa heater up and got that done. So I. Um, that’s was their choices for how they face 2023 then the next year, in 2024 they pushed out all those 2023 projects yet another year, and push the scheduled 2024 Roof Replacement out a year. And they were pretty proud of themselves, congratulating themselves on how much money. They saved no reserve projects in 2024 made it a pretty easy year for them as board members. And then we get to 2025 two years down the road, and they deferred most of their projects another year, but they were required by their insurance agent to get the potholes in the driveway fixed. They were trip and fall hazards as well. They finally got to that project that was estimated in 2023 as just $2,200 but by this time it had grown to almost $8,000 and kind of the same thing with their roof. It was estimated about $72,000 in 2024 but because it started leaking and they had some problems with roof leak repairs, it ended up being about $125,000 project. So it got over $50,000 more expensive. That was a big deal. Lesson here, delaying is expensive, and all those other reserve projects still need to get done. This is going to remind you of that property that CO Lee showed earlier, that it was just plain deteriorated, and that’s board member choices, and that’s what we want to help you avoid doing. And in addition, not too surprising, they were in a financial jam because they were thinking, what? Hey, we’re not spending money. Let’s not setting aside, let’s not set money aside in reserves. So I want to reinforce the idea that expenses are going to happen, they’re going to be expensive, and the costs only get worse if delayed, the costs don’t go away if you choose to not execute the project in the year that they’re scheduled. So our encouragement, update your reserve study regularly and following the funding recommendation, it’s in your own best interests. And now let’s move on to the examples. And Co-Lee, were you able to hear that for me in the application section?

Co-Lee Grev 12:17

Was you sounded perfect? Well, I’m not sure, perfect, but you

Robert Nordlund 12:21

should at least hear me. Okay, are you up for examples? Sure, yeah, take them off to you. Let’s

Co-Lee Grev 12:28

start with one of the most common questions we get is a reserve project, a reserve expense or an operating expense? We do cover that question in detail in an entire webinar on its own. Our reserve Studies Program, 101, which you can find on our website or our YouTube channel. But let me summarize the answer in the next few slides. Think about it like this. There’s a three part test that every reserve component must pass. One, that it’s a common area responsibility. Two, that it can be reasonably anticipated, and three that its cost is significant to the association, every component in your reserve study needs to pass this three part test, and remember that three part test is outlined in those national reserve study standards. But let’s get back to the question you face on a regular basis. How do you know if something is a reserve expense or an operating expense? The answer is yes. If you see if the project is listed in your reserve study, or if the project passes that three part test, and you confirm with your reserve study provider, the answer is maybe, if you don’t see that particular project in the Reserve component, less, but it’s related significant, or if it’s a maintenance project that extends the components useful life. But again, make sure you check with your reserve study provider, so you can really make sure you have clear guidance on this next consider if the expense affects the components remaining useful life. That means a minor service call to a boiler is not a reserve project, but replacing the igniter system that extends the boiler’s remaining useful life by five years, that’s a legitimate reserve expense. So the bottom line is that if you think you should spend reserves on a project and you’re unsure for any reason, reach out to your reserve study provider. You can ask them questions. Even the person who’s doing that boiler service, ask them, Is this a service that is extending its light? If it’s not well, then you kind of have your answer there, but you should check with your reserve study provider. Let me show you how this works. Here’s an example with the component list. All of the projects listed are pretty clear. All the normal things are here, the description, the useful life, the remaining useful life, and the current cost. But suppose your pool heater fails. You see a pool resurface component, the second one there on the list, but no Pool Heater component, from what you’ve just learned, replacing the Pool Heater or pool filter, for that matter, is. Isn’t automatically a reserve expense just because it’s related to the pool. Check with your reserve study provider. There may be a reason it was excluded, or they may support the expenditure from reserves and specifically add it to your component list in the next update, it’s never in your best interest to guess too many properties gradually deplete their reserves by spending those limited funds on non reserve projects. Here is an interested. Here is interested in saving their association some money. How do you safely do that? The biggest way to save money is by avoiding deferred maintenance, like that asphalt project and roofing project, for my example, just a few slides ago, get projects done on time. Don’t let them grow on you. But you’re probably wondering, are there some projects that are okay to delay? Do you need to do all projects on time? No, you don’t need to do all projects on time. Not all reserve projects are the same. Projects fail differently. Some are okay to defer, and some you should really do on a schedule. It’s okay to defer an inconsequential component when cash is tight, it’s okay to stop and not spend reserves and let that asset fail. That might be like an exercise machine in the gym that nobody uses, or the water heater in the pool restroom that’s rarely used. So red means it’s okay to stop and reconsider later. You can live without it for a little while, but you want to think twice about re evaluating any obsolescence projects doing the ones that have true merit for the association and deferring the not needed right now. Projects. If the perimeter wood fence is old but still pretty firm, there’s no need to replace it until it gets a bit wobbly. It’s the protection and catastrophic projects that you want to make sure you do on time. Those are protection projects, like when you paint your wood, steel, your asphalt, they protect the underlying surface, very expensive siding, or the asphalt base structure, or catastrophic projects like the hot water boiler for the entire building, or the entry gate or lobby entry mechanism. Don’t delay those projects. Those are the ones that will get real expensive or cause hardships if you delay can you imagine if the water heater for the whole building goes out? I’m sure many of you have had that happen. Green means go. Just a reminder. Deferred projects don’t save the association and money. Those projects still need to be done, and you have to be careful deferring only the safe projects, because otherwise you’ll cost the owners a bunch of extra money. Remember to contact your reserve city provider if you have any questions. Now, take a look. This asphalt photo is a classic example of a poor decision. Here’s a protection project, a board that delayed doing their protective asphalt seal coat, and as a consequence, the expensive underlying driveway failed. Replacing the driveway cost them between 10 and 20 times the cost of that sale project that they delayed this. Same is true for ironwork. You have to paint the iron work for sure. Anybody else seen something that looks like this on their project? Sorry, Robert, I stopped,

Robert Nordlund 18:20

yeah. No, no, that. I look at this picture, and I was like, what were the What were these people thinking right

Co-Lee Grev 18:26

now, let’s take, go ahead and look at that roof next with all those tarps. This was probably a really bad idea delaying this project or catas, this is like catastrophic for the association. If you’re tempted to delay a project or are unsure, reach out to a subject matter expert, like your roofer, painter or your reserve study provider to find out if delaying is okay. So let me address the problem about what to do in the middle of the year when the cost in the reserve study doesn’t match the proposals that you’re getting. That happens first your bias should be to go ahead and do the project. The issue is caring for the property. Don’t delay unnecessarily, just because you’ve got a price mismatch on your hands. Remember how projects tend to be more expensive when delayed. In reality, some projects will be more expensive or less expensive than expected. If it’s less expensive, the money will be used for other reserve projects. If it’s more expensive, the money will come from other reserve projects. Again, just talk to your reserve study provider and make sure you update your reserve study with this new information, making your reserve study better each time, and your reserve planning more accurate for future years. Now, next we’re going to talk about capital improvement. Can you spend money to add things to your association? Remember that reserves are ongoing for ongoing deterioration, but not to buy new things. So if you’re thinking about buying a new dock where one previously didn’t exist. Just don’t do that with your reserve funds. That’s the key. But if the asset needs to be replaced, it’s totally fine to do a natural up the upgrade, like you see on the slide, replacing an in condensed light with a fluorescent or LED. That might be more expensive, but uses less electricity. So just remember if the asset or project exists is the key distinction. Remember that reserves offset ongoing deterioration of existing assets. Reserves are not a slush fund to be used to buy new things for the association. If your boards ever have a question on this issue, they should reach out to their reserve study provider. Are you hearing? You hearing? Should be counting

Robert Nordlund 20:41

how many times you’re saying the same thing. We might be up at 10, but this, that’s a theme driving

Co-Lee Grev 20:48

that home. Well, let’s talk about money. Next through the year, you’re watching it month by month, or at least you should be. Here’s the question is, if you should feel good about the money, the amount of money you have in reserves, or if you’ve got a problem on your hands, like with components, we devote an entire webinar to this issue, reserve studies, 102, which, again, you can find on our website and YouTube channel. The major point from that webinar is to measure reserve fund size by percent funded, not specifically cash balance. Champlain tower South had about $700,000 in reserves, which sounds like a lot of money until you understand that they had almost $10 million of deferred projects that needed to be done. They were only 7% funded. Percent funded tells us how well the reserve fund meets the needs of the association. Remember that the cost of deterioration is ongoing. Percent funded answers the question, if you have enough reserves in the bank to do what you need to do, which happens when the amount you’ve been funding over the years keeps up with the ongoing deterioration at the association? Remember, like Mother Nature and Father Time, they’re unstoppable forces. Percent funded is kind of like the world record pace line that you sometimes see in a swim race. It allows you to know how we’re doing. A quick answer to what you’re probably wondering is that 1/3 or 33% of associations have a significantly weak reserve fund. Not everyone, many associations are doing okay or have a strong reserve fund, but it’s that 1/3 in the weak range that makes all the news. This chart shows you why percent funded matters. This chart shows you can predict most special assessments. You can see them coming years in advance. When you are looking at your associations percent funded see how common special assessments are in the red columns on the left side of the chart, when the association is in the zero to 30% funded range. But special assessments are infrequent in most of the yellow zones and are rare in the green zone. That’s pretty powerful information you want your board to know. This is why tracking your reserves on a percent funded basis is more effective than just tracking your cash flow balance. But cash flow balance is still important. You don’t want to have more than $250,000 in one financial institution, bank. Every bank only ensures its deposits to 250,000 so if your reserve balance is approaching or exceeds 250,000 get some professional assistance. You’re not trained to be a professional investment manager. There are many out there that specialize in community associations. I expect you’re probably thinking, what’s it take to adequately fund reserves offsetting ongoing deterioration? And the answer is the opt in about 25% of the total budget, like we show in this pie chart, like I said earlier, owning and maintaining real estate is expensive, and remember, your choice is ongoing funding or a special assessment or loans, the costs aren’t going to go away. It’s worth spending a moment more on this. Let’s that’s because, with budgeted funding, every owner pays their fair share to offset deterioration that happened at the property over the time that they lived there, and in doing so the funds will exist when needed to get those big, expensive projects done on time. And that means your reserves are strong enough, and your percent funded is high enough that special assessments don’t happen at your association, which is the goal. It’s a great thing, and besides, remember that it’s the board’s job to budget for the sustainability of the association. I know some of you probably get distracted thinking about your association that they’re not putting close to the 25,000 or 25% of the total budget aside, and wondering if it’s even possible to do more, but I’ll tell you that reserve funding is not too expensive. So even 25% of the total budget often works out to be the cost of a premium coffee per day. That’s very affordable. If someone says they can’t afford it, they’re just plain wrong. Besides, another fact is that budgeting reserves funding is the least expensive way to pay for reserve projects over time, your choice is how the owners pay for it, not if they will pay for it. So choose the least expensive option with budgeted funding for a $250,000 roof projects, owners will pay less than $250,000 due to the compound interest earned from the bank. A special assessment will pay directly for the expense your $250,000 special assessment goes straight to the roofer. But if you start thinking about a loan, remember that at current rates, it will take about $320,000 from the owners to pay back that $250,000 loan. Like we’ve said plenty of times before in this webinar, this is just another way that delayed just gets expensive. Budgeted funding will cost the owners less than a special assessment or a loan. Are you still bothered that this is going to mean a big increase for your association? Consider something we call the $10 solution. It likely took your association years or decades to get to an underfunded jam check with your reserve study provider, you usually can take a few years to get out of that jam. If you consider raising your reserve funding by $10 per month per owner this year and then another $10 per home per month the following year. In most cases, it just takes two to five years of those $10 increases to raise the reserve funding to a really sustainable level. Well,

Robert Nordlund 26:45

COVID, that’s fantastic information. When I think about it, I think $10 a month per year, that’s a very doable increase. It’s hard to say that our owners can’t afford another 10 bucks a month. And you do that for a few years, and your association turns from one that doesn’t have enough money to one that does. Let me spend a few minutes now here wrapping up our program for today. What’s a nice checklist to look for? Okay, let me show you here on screen, look for the year that the reserve stay was prepared for, because, as we tried to make clear they quickly get out of date. Know the type of reserve study? Now you know there’s three types, the full the with site visit update and the no site visit update. And then look for three things in that reserve study, the component list to see your reserve projects. Number two is an evaluation of reserve fund strength, which is best measured by percent funded. And number three is the multi year recommended funding plan, how much they actually be setting aside? And after you’ve received the reserve study, what do you do? Then, what do you distribute? Well, we recommend distributing the executive summary to all owners. It’s a short page or two, and then leave the complete reserve study for those that specifically request it. And then, what does success look like? We suggest you measure success by lack of disruptive special assessments, by projects getting done on time, by the percent funded at your association being 70% or higher by reserves being spent only on reserve projects and no borrowing from reserves to pay for operating fund projects, because you never budgeted enough on the operating side of the equation there and then updates. Remember that If your reserve study is more than three years old, it’s likely not giving you good advice anymore. You’ve probably changed so many things from the original plan, property, conditions, project costs, projects that you did or didn’t do, reserve balance, interest and inflation. So you don’t want to be following an outdated map to the future, and want to leave you with a little pro tip, because your reserve study information is always in a constant state of change. We measure here at Association reserves that they are 30% fewer special assessments among our clients that update their reserve study annually. And remember those no site visit updates are really pretty inexpensive. Having fresh information makes a lot of difference, and that brings us to the end of our planned content today. Co-Lee and I want to thank you for joining us, for tolerating a little bit more back and forth than we expected. I guess that makes us our custom program here today, we want to help you make wise reserve funding and spending decisions on your journey to the future. Colie said it many times, don’t think of your reserve study as just something that you get. Think of your reserve study provider as someone who’s on your team. If you have a question, reach out if you are interested in being. Notified of upcoming project programs like this one, just scroll to the bottom of our homepage, or actually any page on our website. And if you wish Association reserves to support your association with a reserve study, click a link at the top of our homepage to request a free reserve study proposal. And Colie gave you kind of a tip on that. If you search anywhere on YouTube for reserve study videos, you’ll likely find plenty of ours, and if what you see is helpful to you, consider giving the video a like and subscribing to our channel so you’ll be notified of all the new content that we provide. Or if you’re a reader or want a great written resource that summarizes all the major reserves, a concepts that we’ve addressed today. Consider ordering our book understanding reserves. I’ll put a link in the outline to where you can download chapter one for free. And if you like what you see, get a copy by ordering straight from Amazon. It’s inexpensive. It’s a paperback, and I’ve got a copy right here on my desk that I’m holding that I’ll sign and hand out to someone who asks an interesting question during our upcoming Q and A time. And I want to point out that perhaps one of the best resources we have is our online reserve calculator, called you planet, if you want to work with the pros and cons of different variations to your reserve expenses or your reserve funding plan, or perhaps you’re getting ready for a budget meeting and you want to test a few different scenarios you plan. It allows you to test different funding plans and expense scenarios. It allows you to test and see if you like what happens. Make those informed adjustments to your budget plan and prepare for questions from your homeowners. What happens if we do this, or what happens if we don’t do that? And again, it’s free with every professional reserve study from Association reserves and speaking of free, here’s a great resource for our board member audience, a weekly 30 minute podcast just for you. It’s called HOA insights, common sense for common areas. You can get there at Hoa insights.org, or anywhere that you listen to podcasts, share it with your homeowners, so they begin to think and engage like board members, feeling like it’s their association too, and to start thinking how they can help take good care of the place. All these different questions. How do we understand what’s going on with the board? Can we plug in and lead board members all across the country are carrying this entire community, association, industry of ours on their shoulders, and this podcast is there to help the board members carry that heavy load. It’s full of guest experts current issues, and once a month we actually feature a board hero, so join us weekly at Hoa insights.org, or subscribing from your favorite podcast platform, and with that, I’ll turn the microphone over to Kali, Who will coordinate our Q and A time together.