Re: Reserve Studies
From: Sharon Villines (sharonsharonvillines.com)
Date: Mon, 7 Aug 2006 05:16:55 -0700 (PDT)

On Aug 7, 2006, at 2:13 AM, Brian Bartholomew wrote:

It's reasonable to expect an investment can earn 4% a year, each year
for 20 years.  I'm really rusty, but isn't the long-term stock average
something like 12%, not counting inflation?  Which makes the real rate
about 7-8%?  What happens to the reserve if inflation goes over 7% to
create the appearance of paying out social security for baby boomers?

Our current consultant is using 6% at the moment but they also advise yearly reviews to adjust for changes in assumptions.

In general, is
there some way to spend that HOA reserve immediately on maintenance
rather than trying to save it and maybe not succeeding?  I've read
that continual gentle maintenance is better for buildings, anyway.

"Capital Replacement Reserves" can ONLY be spent on replacement and not on annual (or multi-annual) maintenance. This is to ensure that the fund is available for "future generations" and cannot be spent down today by residents who then move out leaving a mess. Think of this fund as preserving the real estate in the condition it was when it was purchased. It's purpose is to "make new" the things that you buy and sell. A poorly maintained but solid capital investment can be "re-maintained" to coin a phrase with a new paint job, but when the roof is gone, you can't resell.

Certainly good maintenance protects the current investment. If you maintain well and roof lasts longer, you do not have to keep putting more money into your reserves to replace the roof. A reserve study calculates how much needs to be saved each year to reach certain projected needs. If your needs fall below that because you have done good maintenance, then you can reduce monthly contributions and lower monthly dues. That is why our company recommends yearly "paper" reviews of the studies they do.

We also have a maintenance fund for major maintenance work like painting every 6 years, roof and gutter cleaning, storm sewer cleaning, etc. We just created this fund a few years ago when we suddenly had to clean our storm sewers and had no idea that was something we had to do, ever. Our new reserve study will also include a maintenance study so we can better estimate big maintenance costs.

Also, I should note that I am assuming that there are good companies everywhere doing reserve studies -- you just have to find them. This, of course, may not be true of your area. If there are not a lot of condominiums that need reserve studies, no one will be specializing in them or even understand them. But if you read up and talk to experts in other places, you can get a company to do a better job than you would get otherwise.

We learned, for example, after our first study how much detail we needed in order to determine if an item was even covered in the reserve study. Some of the items were so general we had no idea what they were. Our new company had the same problem so it wasn't just our ignorance. They were free-form descriptions the old company had used for things like "commonhouse wall coverings." What is that? Medieval tapestries? So, you learn. This time we were sure to ask for specific descriptions and will be going through the study before we accept it to be sure the descriptions are things we can understand.

Sharon
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Sharon Villines
Takoma Village Cohousing, Washington DC
http://www.takomavillage.org


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