A typical condominium Reserve Study has 30 to 50 components that meet the criteria for reserve funding according to National Reserve Study Standards, with their associated expenses occurring at varying intervals throughout the 30-year study period. Planning for this somewhat complicated array of expenses can much more easily begin by simply focusing on the “The Big Seven” (used to be six until WA reserve law changed in 2012 to include plumbing) as they apply to your community. Put together a solid funding plan for these components and you’re likely to avoid special assessment and the myriad of problems that come with it.
So what are “The Big Seven” reserve components?
Asphalt, Decks, Painting, Roofing, Siding, Windows & Plumbing
If your community is a mid or high-rise, you can substitute elevators and mechanical equipment for asphalt. If you live in an HOA, your short list is different; likely to include fencing, playgrounds and other recreation equipment, perhaps roadway, landscaping items, lighting, signage, a clubhouse, etc…
I took a random sampling of four completed condominium Reserve Studies in preparation for this article to determine just how significant the percentage of the total association reserve assets these components are: 8 units in Tacoma 79% (and they don’t have decks), 35 units in Renton 84% (owners responsible for windows), 12 units in Seattle 80% and 58 units in Big Sky Montana 86% (I met a brown bear face to face on the road doing this one….). You can see the vast majority of assets in these examples fall within the Big Seven classification.
It is difficult for many of us to look 20 to 30 years into the future as it relates to planning for our residence, so a very effective strategy is to begin your focus and discussion with the membership on the next 10 years. Typical ownership periods are often within that 10-year period and one or more of those Big Seven expenses are likely to occur in that time frame. If your community is 11 to 20 years old, more than one is likely to occur, and if it is 21 to 30+ years old, you may have to face all of these projects within that 10-year planning window. Focusing on these items will illustrate the majority of the community’s near and mid-term cash flow needs without getting mired in the debate of whether or not the mailboxes should be in the Reserve Study, or why anyone in their right mind would plan for 30 years worth of projects… Then you can move on to addressing the other components in the study. Changes to WA law in 2012 now require that the association present a 5-year cash flow disclosure to the community if the board chooses reserve contributions different than recommended by their professional Reserve Study.
Here is another effective strategy to simplify the reserves planning process: Ignore these confusing terms within the Reserve Study (for now): Percent Funded, Fully Funded Balance, Full Funding, Threshold Funding and Baseline Funding. Open up the study to the 30-year income and expense detail, tear out the pages that show the next 10 years of income and expenses year by year and set the rest of the study aside as light reading for a later date. To determine a starting point for a stable reserve contribution rate over that time period, review and sum the expenses projected over the next 10 years, divide by ten, then again by 12 if you are seeking a monthly reserve contribution rate. Now ask yourself how much of a minimum balance in any given year you feel comfortable leaving the community with to guard against surprises, cost overruns, projects needing to be done sooner or at a larger scope than estimated. You can view this minimum balance question as a percentage of expenses. For example, you might have a policy that states the ending reserve balance in any given year should not be less than 25% of the projected expenses in that year. Or, you may consider a policy of not letting the reserve balance go below $50,000 or similar (I like the first of these two approaches better). These approaches are termed threshold funding plans; plan choices other than Full or Baseline Funding. When you have your beginning point, discuss with the rest of the board, then the entire community. And if you dare, look at years 11 thru 20 next to see what might be coming your way during that time frame to determine how it might affect your plan. Communicate and disclose should be your mantra for reserves planning.
I am somewhat surprised by the number of Associations who do not clearly understand their maintenance, repair and replacement responsibilities for the common and limited common elements of their community. Many times they are different than what the association believes they are. I strongly advise all Associations that have not previously done so, engage a knowledgeable law firm to review their governing documents and draft an Association Responsibility Matrix. This legal review and resulting responsibility matrix can be a critical component to the planning process.
Washington law changed in 2012 to amend the Condominium Act , requiring your Reserve Study provider to specifically address the “Big Seven”. The Reserve Study must provide an explanation if any of these components is not recommended for reserve funding. The 2012 changes in Washington law also require HOA’s with significant assets to perform a reserve study. Further, all Reserve Studies (for condo’s and HOA’s) must to be disclosed to all owners during the budget process.
The lessons I’ve learned during the last few years particularly in my own planning, have resulted in a simplification of my thought process. Consider doing the same and put your Association on a path to a successful future.