Re: Saving up for a capital expense
From: R Philip Dowds (rphilipdowdsme.com)
Date: Sat, 7 Nov 2020 08:49:37 -0800 (PST)
I’ll offer some Cornerstone views on some of Peter’s comments about Nubanusit.

Yes, we have a reserve plan which includes updates every three years.  A 
capital replacement reserve plan is a map of money over time.  The basic 
components of such a “long term” plan are (a) estimates of which major systems 
will likely need replacement when, at what likely cost, and (b) a collection 
scheme that ensures enough money is on hand for the expected and the unexpected 
(something breaks early, or a project over-runs its estimate).  Our "low dollar 
threshold" is $5K.  And the reserve account is carefully isolated and protected 
from any annual operating costs or “improvement” projects.
      A big difference might be that we did not hire a reserve consultant for 
comprehensive services and plan design.  We set up our own spreadsheet models, 
and limited our reserve consultant’s input to details of timing, and of lump 
sum and unit pricing, for the various replacement items recognized in the plan. 
 Devising a broadly accepted collection formula involved some political heavy 
lifting, but we got there.

On the operating side — very isolated from the reserve side — we set our annual 
budget based on history and best guess estimates for routine maintenance, 
utilities, insurance, teams, etc.  However, we ALSO maintain an operating 
contingency of $25K to $50K for ugly maintenance surprises.  If forced to spend 
from this contingency, we are likely to make up the difference in increased 
fees for one or two subsequent fiscal years.  If things get really unusual or 
desperate, we can and do borrow from the reserve, and make up the difference 
over time.

Does maintaining substantial savings unduly benefit somebody other than current 
owners?  One theory is No: Savings protect all owners from sudden special  
assessments, and can be recognized as value increasing the common wealth and 
resale value of any unit.  Not everyone agrees with this theory.  In any event, 
thus far, we’ve had no issues with the IRS.

Special assessments?  This has been highly controversial at Cornerstone.  The 
minority view is that it’s a mistake for the community to save away big bucks 
for much of anything; better to collect the roofing project money by special 
assessment shortly before the roofer shows up.  However, the majority view 
seems to have settled in as: A constant and dependable annual budget and 
monthly fee is better than wild swings from year to year.  In this view, our 
savings act as financial flywheels, smoothing out the collection rate even as 
stress on the machinery ebbs and flows.  My personal view and experience is 
that special assessments are almost always controversial and painful.  No 
matter how many plans you publish, and how often you warn people, some 
households may not be ready, or content, to throw in an extra $1K to $5K in a 
single payment.

Almost all our common amenities see differential use.  The point is: They are 
common.  We all join in as owning and maintaining all of them, for the 
(potential) benefit of the whole community, and its ever-evolving membership.  
Optional spending on the commons does not happen outside the consent process, 
and Mass law requires that any “improvements” bought with common funds be 
ratified by at least 75% of the percent interest ownership.  (But every rule 
has exceptions: We recently completed major outdoor infrastructure for the 
charging of electric vehicles — and the cost of this enterprise was subsidized 
by a few particularly interested households …)

A while back, I made a study of community finances, and was astonished at the 
great variety and diversity of finance policies and accounting schemes among 
the study group.  There are lots of ways to do all this.

Thanks,
Philip Dowds, Treasurer
Cornerstone Village Cohousing
Cambridge, MA

mobile: 617.460.4549
email:   rphilipdowds [at] me.com

> On Nov 6, 2020, at 2:11 PM, Peter Orbeton <peter.orbeton [at] gmail.com> 
> wrote:
> 
> Hi - I served as the Treasurer at Nubanusit Neighborhood & Farm for seven
> years, and remain on the Finance Team. We are self-managed. Although a
> co-housing community, we are subject to the NH state condo act. Here's my
> perspective.
> 
> Get and keep up to date a Reserve Analysis (aka Long Term Reserves - LTR).
> Our consultant recommended picking a low dollar threshold (we chose $2000)
> below which capital items like a washer, etc. are not included. Use your
> operating reserve funds to replace those items. Also, LTR's should only be
> used for its component items. Although a component item has an expected
> life-time, don't feel compelled to replace the item at the end of its
> expected life-time if it doesn't really need to be. Just let the funds
> remain in LTR. At some point, that item will wear out. And when you update
> your Reserve Analysis, let your consultant know and the clock will be reset
> so to speak.
> 
> Specify an operating reserves amount annually in your budget. We, for
> example, had to raise ours recently when we had to switch insurers and the
> deductible went from $2500 to $10K (ouch). Pick a reasonable amount
> otherwise the IRS may take a dim view - you shouldn't be accumulating funds
> that do not benefit recent or current owners. A web search turns up a
> range. For 2021 NN&F's will be about 15%.
> 
> For a known upcoming capital expense (for example, a new front walk to our
> Common House), we funded it over two years; max has been three. The funds
> were rolled over to the next year. Yes, it may make your operating reserves
> account have a bit more in it, but don't over do it. Bigger ticket items
> (we purchased a new farm tractor a year ago) should be funded by a special
> assessment.
> 
> Familiarize yourself and others with IRS regulations. The IRS is quite
> strict about LTR funds and excess member contributions. For example,
> directing excess member contributions to the LTR account is a no-no. Our
> attorney has also advised us to have the unit owners pass an Revenue Ruling
> 70-604
> <https://www.garyportercpa.com/index.php/component/content/article?id=147:re>
> designation
> annually.
> 
> Finally, consider what we refer to as our "for good cause" provision in
> your bylaws. Our attorney suggested it as a layer of protection from owners
> feeling a budget item (and their dues) may not benefit them. For example,
> we have a small pond, used for swimming and ice skating. We periodically
> replenish the beach sand. Not all owners use the pond. The provision is
> quite simple - "Such budget, for good cause, may also grant concessions on
> common area expenses or direct dues that may benefit less than all units as
> may be recommended by Plenary and ratified by the UOA through the budget
> approval process."
> 
> Hope this is helpful.
> 
> Thanks, Peter

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