Cohousing-L Mailing List: Re: Large Increase in Capital Reserve requirements

[Sharon Villines (sharon]

> On Jul 8, 2024, at 10:38 PM, Chris Hansen <itschrishansen [at] gmail.com> 
> wrote:

> We have just undergone a Capital Reserve Study which has necessitated a very 
> steep increase requiring us to raise $50k-$60k each year for the next 9 or so 
> years.

20 years ago I did an extensive study of reserve funds because I was naive 
about real estate development and maintenance costs. One thing that may have 
changed for newer communities is being more realistic from the beginning about 
how much it costs not just to construct but to maintain real estate. 

We had several major jolts — our monthly dues needed to be increased 300% 
during the first year and our reserve funds increased significantly a few years 
later. Our monthly dues were then raised another 10% in one year.

There are many messages in the archives about reserve studies but I will list 
some highlights:

1. Adequate reserves are the best way to maintain affordable communities. 
Lower-income households are less likely to be able to afford sudden expenses or 
monthly fees that increase by more than 2-3%. Reserves allow you to avoid 
surprises and allow your members to feel secure.

2. The first reserve study should be done _before_ you move in for two reasons: 
(1) it is necessary to determine the monthly fees. (2) The developing party 
should include in the construction budget an amount for establishing a reserve 
fund. It is not unheard of that in the first 1-3 years something big will be 
insufficient and need to be upgraded or redesigned. Particularly when 
communities have pushed new and untested materials or designs surprises lurk.

3. Thinking long-term helps people understand why the reserves need to be so 
large. A chart of 100 years of repeating expenses convinced our people that we 
had to think ahead. At 20-25 years and again at 40-50 years there are major 
expenses for replacements. Like cars that have 50,000-mile and 200,000-mile 
tuneups. Yes, the farther out you go with estimates the more unpredictable they 
are, but it’s better than nothing. Each time you do a study, you adjust the 
figures.

4. As Phil said, the 70-80% funded amounts are typical. The other number that 
Reserve Associates calculated years ago based on thousands of reserve studies 
is that at 40% funded communities begin to avoid making necessary replacements. 
This is when property values begin to slide, Deferred maintenance is much more 
expensive and leads to complete replacements which are even more expensive.

5. Low-income or mixed-income developments have to budget differently than 
high-income developments. In discussions about reserves, you may see comments 
like "Reserve funds are a total financial waste. They pay almost no interest 
and hold up my money when I can make more myself. And they are never accurate 
anyway.” High-income households have savings and investments that can earn much 
more than low-risk reserve fund investments. A ritzy condo may have no reserves 
at all because its owners can afford annual assessments of huge amounts and 
prefer that method of financing. Cohousing is not one of those. Cohousers need 
the security of predictable costs.

6. If your reserves are too low it can affect the resale value of units. Smart 
condo buyers and realtors will evaluate the reserves to ensure that there are 
funds set aside to maintain the building's value at market rate. The roof is 
being used today by the current residents and they should be saving to replace 
it when necessary. When someone buys a unit in 20 years they will want to know 
that the roof is new or there are funds available to make it new. 

7. Having good reserves gives you much more flexibility so you can make good 
use of the funds. For example, when we installed solar panels, the roof was 
almost up to its useful life. Replacing the roof before we installed the panels 
allowed us to avoid having to remove them to replace the roof in 5 years. 
Delaying the solar panel installation meant that we were losing money on 
electricity. We have the funds so we replaced the roof and added the solar 
panels. That saved us $2,000 a month in electric bills which we used to pay for 
the solar panels and we received payments from the city for generating extra 
electricity. And the roof we installed was a 50 yar roof instead of 20-25. Rich 
people can save a lot of money by having flexibility. You want to be rich.

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