|Re: Operating budget||<– Date –> <– Thread –>|
|From: Sharon Villines (sharonsharonvillines.com)|
|Date: Fri, 8 May 2015 11:38:10 -0700 (PDT)|
> On May 8, 2015, at 11:27 AM, Willow Murphy <willowm7 [at] gmail.com> wrote: > > Do you > strictly follow your reserve study recommendations or use this as a guide > and make decisions based on your community's particular needs each year? (I’m doing a presentation at the cohousing conference on reserves so this is probably more than you wanted to know but here it is anyway.) At Takoma Village we get as close as we can to reserve study requirements and have healthy reserves. About 25% of our monthly condo fee goes to reserves. We are one building that includes the CH, apartments, and townhouses. The reserves include everything except the interiors of units. We do formal reserve studies every 3-5 years and have a conservative but not rigidly conservative reserve study team. We’ve done studies sometimes for 30 and sometimes 100 years. PHILOSOPHY OF RESERVES You had no idea that there were philosophies of reserve studies but there are. The two polar opposites, exaggerated to emphasize the differences, are: 1. Long term comprehensive reserve studies Projected expenses over 50-100 years for all physical elements — electrical wiring, sewage pipes, sump pumps, furniture, landscaping, all plumbing, HVAC duct work, etc. Everything that will at some point need to be replaced and upgraded to the future standards. The largest replacements occur at 50 years, and “50” is an estimate. Some will be done earlier and some later. Projecting out over 100 years doesn’t make much more difference because it includes repeated replacement of the same items. But it does show the expected rate of inflation in construction costs which can be scary. 2. Short term just adequate reserve studies Projected expenses for 20-30 years for only those items likely to need to be replaced in any one year. It only protects against what might go wrong in the short term, not against a possible or a probable long term scenario. But it means you are only saving for 50 year items for 20-30 years, not 50. For example, we have 12 sump pumps: 1. The long term comprehensive study would include all 12 and project the replacement of all of them every 5 years multiple times over the period of the study. 2. The short term just-adequate study would include the number of sump pumps that might need to be replaced in any given year — 7. UPDATES, 5 vs 3 YEAR STUDY The first reserve study and the 5-year study include onsite analysis of current conditions. Large condominiums, my aunt the commercial realtor says, do full onsite updates every 3 years because the amounts and risks are so much greater. The 3-year update is often a financial recalculation based on actual amounts deposited and withdrawn. REASONING FOR DOING RESERVE STUDIES The primary purpose of the reserve study is to ensure the community’s ability to replace and upgrade to future standards. You won’t be able to sell deteriorating or antiquated units very easily, and not at market rates. If the current reserve deposits are too low, future owners will have to pay for things that are being used by current owners. If you move into a condominium for which the previous owner has not saved anything to replace the roof, and hurricane Harvey comes along or mold sets in, you will be hit with a large assessment right off the bat. While most potential cohousing owners don’t know how to evaluate reserves, and their lawyers often don’t either, and they don’t use realtors, they won’t understand whether reserves are adequate or inadequate. But when I lived in NY City, some realtors would not recommend purchasing in some wonderful buildings because they had no or insufficient reserves. These buildings did repairs and replacements by assessing the owners at the time of the expense. That means only people with very large incomes and many assets could take the risk of living there. When my daughter bought a condo in NYC, she had an assessment two months later of $600-900 a month for the next 3-6 months. I forget the exact numbers but I was shocked. Her lawyer had just told her the reserves were perfectly adequate. The building is occupied by people who have been there 50 years and are selling to younger people. The long-term residents had no interest in saving for replacements they would not benefit from. And the young people had no experience to compare it with. My daughter’s lawyer was making comparisons in a very high income market. The same problems with in-adequate reserves will eventually catch up to cohousing communities that are not following best practices in financial planning. If keeping housing affordable important, under-saving is not the way to do it. Most cohousers don’t have $10,000 laying around for an un-budgeted expense. ARGUMENT FOR LONG TERM STUDIES I favor both long-term and comprehensive studies. A comprehensive study has information beyond the projection of future costs. It can be used for managing the property. It will list the number of SF of sidewalks so you can determine the costs of replacing with concrete or permeable pavers, and the year by which you need to make a decision. It is useful for determining operating budget projections, cost comparisons, understanding what is in your building that you need to pay attention to, etc. The size of HVAC units. It can be used to estimate the relative costs of replacing with wood or Trex. Yes, you can get professional estimates done but in early planning having these figures can be very useful. They are also useful in telephone consultations with professionals. We have often gotten cost estimates this way without the trouble of arranging onsite visits. You can use a detailed reserve study to determine if you are being overcharged for an emergency replacement of a sewage ejector pump when it is costing you $200-$400 an hour for the workers to sit there while you decide what to do. One of our 50-year items is the Hardy Plank siding which is projected to cost ~$400,000 to replace. Saving for 30 years it will require saving ~$13,000 a year. Saving over 50 years, $8,000 a year. For some communities that may not make a difference but for others it will. Because our roof is deteriorating faster than the projected 25 years and we want to install solar panels, it is cost effective to replace our roof after only 15 years. It will cost $100,000. We have been saving ~$5000 a year for the roof. If we didn’t have adequate reserves for other items, we would have an additional assessment this year of $25,000 or an average of ~$600 per unit. Large units would pay significantly more. And unexpected expense of ~$600+ in one year doesn’t sound like much to many people but on top of our 6.5% increase in monthly dues this year, it would be a hardship. (Most of the dues increase is for utilities, insurance, etc., that are not under our control and not optional.) We have had three households without jobs for several months this year, one for more than a year. Since the recession, others have been under-employed for years. Some new residents are recovering from moving costs and others from new babies and unpaid parental leave. Because we save almost as much as our study recommends for a detailed list of items, we have the funds to do the roof replacement now and take advantage of energy rebates without making additional assessments or taking out loans. Because we are upgrading to solar, the catch-up payments to the reserves will come from savings in utility bills, projected to be $13,000 a year. Our well-maintained reserves allow us to benefit in future savings. COHOUSING VS OTHER TYPES OF RESIDENTIAL PROPERTIES The person who has done our long-term comprehensive studies, is an architectural consultant specializing in sustainable construction and design, and he was on the CAI panel that set their reserve standards. He says the reasoning behind short term studies is based on commercial housing. Rental and hotel properties normally expect to completely rehabilitate and refinance in 20-30 years. Some will even build to tear down in 20-30 years. Saving for 20-30 years makes sense to commercial properties because they are financed differently. And most reserve studies are done for large condominiums or commercial properties like hotels and other short term or seasonal residences. The Property Management Association considers 400 condos to be small. Just adequate studies are often done to protect the liability of the board. If the board has not maintained adequate reserves, it can be held accountable, as in taken to court, by residents for mismanagement. When presenting financial documents to new buyers who understand the need for funding the reserves, it is an immediate alert when the reserve study requirements exceed the amounts in the reserve fund. Thus it is beneficial to boards to have a reserve study that requires only the minimum. Cohousing is more like single family homes. Owners want them maintained so they will last “forever”. The intention is very different, and thus the financing is different. Thus long-term studies better suit the purposes. Sharon ---- Sharon Villines Takoma Village Cohousing, Washington DC http://www.takomavillage.org
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