Cohousing-L Mailing List: Re: What is your community's current reserve funding level?

[R Philip Dowds (rphilipdowds]

Coho Friends —

I agree with Sharon most of the time … but in this case, I think I’m somewhere 
else.  See below ...

> On Oct 5, 2024, at 2:56 PM, Sharon Villines via Cohousing-L <cohousing-l [at] 
> cohousing.org> wrote:
> 
>> On Oct 4, 2024, at 10:54 PM, Sylvie at Hotmail <s_kashdan [at] hotmail.com> 
>> wrote:
>> 
>> Clarification
> 
>> As part of our discussions, some people are wondering whether or not other 
>> communities that have reserve funds are currently funding them at levels 
>> lower than seventy percent for the end of the thirty year period. Have any 
>> communities had positive or negative experiences related to the level of 
>> percentage funding of the reserve funds.
> 
> I’m greatly encouraged by the number of communities who have responded with 
> information about how they do their reserve studies. When I started this 
> conversation almost 20 years ago and doing workshops on the topic, almost no 
> one had reserves or a reserve study. I mean that literally.
> 
> We have had good reserves since the beginning because we had a few members in 
> the financial industry who knew how important they were. I learned from them 
> and it has been a great boon to us.
> 
> Recommendations based on experience:
> 
> 1. Ask the Assoc Reserves to run the numbers for 100 years. Obviously 
> guestimates can’t be so accurate that far out BUT the graph is totally 
> convincing. It was our 100-year graph done by our first reserve study company 
> that convinced our members of the need to save now for the future. A 30-year 
> timeline does not show the huge amts that will most likely be required long 
> term. The visual mountain is entirely convincing.

I have several reasons for foreshortening the perspective:

Proper maintenance, and strategic capital replacement, can keep most buildings 
in service as physical artifacts for hundreds of years.  The Pantheon in Rome 
is a marvel, particularly since it was built before the discovery of steel 
reinforcement.  But let’s face it:  Apart from its value as a historical 
reference and a tourist attraction, the Pantheon has no role to play in modern 
life or culture.
      What knocks buildings out of the box is functional obsolescence.  Maybe 
in the future, households will be smaller, with more single person occupancies; 
we’ll need more studios and one bedrooms.  Or maybe they’ll be bigger, with two 
or more unrelated families sharing in common one large living/dining, one 
kitchen and a cluster of bathrooms.  (No, not yet a thing in America — or more 
accurately, Americans with means —  but I’ve encountered several such in the 
Cambridge area …)  Or maybe net zero construction is a top societal priority, 
and your whole building will not fit the bill.
        For estimating purposes, the federal GAO uses 50± years as an average 
useful functional life of a structure.  So it’s quite possible some of our 
beloved coho buildings will be demolished and replaced in another one or two 
generations.
Reserve savings and capital replacement plans depend heavily on what you 
imagine as the inflation rate for construction costs.  Many reserve consultants 
use 3% per annum as the gold standard for US inflation, and indeed, for recent 
decades, this has been a good number for the Consumer Price Index and its 
relatives.  But many or most construction experts think 3% is light for 
construction cost inflation.  In Boston, during the four recent years of 
pandemic (2020-2023), construction price inflation is reported as more like 9% 
per annum.  And …
Technology and public programs really do change.  We had some common house HVAC 
which, after 24 years, was either dead or near-comatose. Our plan for savings 
was based on a one-for-one replacement (which had in it some errors), but in 
2024 we found we had access to both new heat pump technology and a public 
subsidy for replacing existing gas with high efficiency electric.  In the end, 
our replacement version (not perfectly one-for-one) cost less than our plan 
estimate.

So:  Cornerstone has tried to create and manage plans with a 30- to 50-year 
look-ahead — and we’ve not been happy with the results so far.  We’ve collapsed 
back to 10-year look-aheads, with an intent to re-engineer and re-estimate 
projects much closer to their actual implementation dates.

> 
> 2. There is good fortune out there. Knowing what things might cost is 
> educational and allows you to plan. It also allows you to change. And having 
> funds available for changing. I’ve promised to write up this example, and I 
> will, but here is the short story. When it became cost-effective to install 
> solar panels, we had the funds to install them by borrowing from the reserves 
> and using donations. We were installing panels 2-3 years before we were to 
> replace the shingle roofing. The shingle roofing was already showing signs of 
> wear so it was an accurate prediction. Why install solar panels over a 
> roofing that would soon need to be replaced and we would have to remove the 
> panels to do it? We had saved the money to replace the shingle roofing so we 
> folded the replacement into the cost for the panels and did it all at the 
> same time.
> 
> The result was we replaced the 20-year roofing with 50-year roofing (at the 
> earlier cost for 20-year) and installed the panels. We used the savings in 
> electrical bills to pay back the reserves. And the rebate from selling extra 
> electricity back the city was added to that eventually — the city was very 
> wishy-washy about buying electricity and it was unclear if they would give us 
> credit or actually pay us. Credit, of course, we couldn't really use unless 
> all our panels failed. Theydo give us credit now but the basis is not really 
> dependable. New mayor, etc.
> 
> Having money on hand is worth far more than most of us who have lived week to 
> week or month to month realize. Flexibility allows you to take advantage of 
> opportunities and reduce costs later on. Every property decision is a 
> 100-year calculation.

I agree that thinking ahead, and saving money ahead, and sequencing 
cost-effective spendings, are all important parts of most of life’s endeavors.  
Best-guessing future scope and costs, and collecting monthly dues for many 
years in advance, is an important strategy.  But I would also assert that in 
addition to saving up monthly dues, two other appropriate sources for funding 
big capital replacement jobs may include both supplemental (one-year?) project 
assessments, and bank loans.  Arguments favoring this multi-source approach are 
detailed, and postponed to another time.

> 
> 3. As Grace Kim said, affordability requires no surprises. There are no 
> margins for error in low or even middle-income households. They just don’t 
> have extra money sitting around. For example, very wealthy communities carry 
> very low reserve accounts because they do have extra money sitting around. 
> And as individuals, they can invest money for higher returns than condo 
> reserves can be invested so they are wasting money by having it sit in safe 
> reserve accounts. When $25,000 from every unit is required is needed in 60 
> days they have it.

Surprises and disappointments are inevitable for most properties, and most 
lives.  Seeking to build a disappointment-proof building is unrealistic.  Unit 
owners must buy in prepared for a certain amount of disappointment.  If they 
buy in to a situation where their housing costs are ±30% of their total 
household income, they can usually tolerate a modest amount of ugly surprise.  
If they buy into a situation where housing is claiming 40-50% (or worse) of 
their household income, they will have little or no financial flexibility.  
Even a flat tire may be intolerable.  Also note that sudden reversals in 
employment or health can ruin the financial plans of even the most foresighted 
and disciplined households.

But in general. Yes:  I’ve actually seen a project where coho households were 
asked to deliver an immediate special assessment in the lower five figures, and 
it was no fun for anyone.

> 
> 4. A great boon to us has been owners donating to a Special Projects Reserve 
> Fund. When they sell their units they are reminded that the whole community 
> has worked to make this a good place to buy a unit and the Resale and Rental 
> Pod has replaced the need to pay a real estate agent which has saved them a 
> 7% realtor's fee. Almost everyone has donated in the range of $8-10,000 to 
> that fund. At 15 years people began to move to assisted living, downsize, 
> move to a better school district, or die. That fund has grown considerably. 
> Even 3% of a $500,000 sale is $15,000.

I think Takoma Village has done a fabulous job with its resale support program, 
and Cornerstone is trying to copy it (with some success).  In addition to 
savings, supplemental assessments, and loans, donations can be an important 
fourth source of income.  The term “Special Projects” suggests to me that these 
donations are dedicated to improvements, not routine maintenance and 
replacement.  Good choice.

> 
> 5. It is also possible to put a lien on a unit that can’t afford to pay so 
> those funds are collected with the unit is sold. If the community can afford 
> the costs in the meantime, that is a sure way to be reimbursed (if the market 
> is good, etc.) and allows a household to stay in the community until an 
> agreed upon event/date.

OK.  Liens are not ideal; Cornerstone has liened only once.  Personally, I’d 
keep liens as as a last resort, after all the other strategies have come up 
short.

> 
> I’m so glad you explained the problem. 
> 
> Sharon
> ----
> Sharon Villines
> Takoma Village Cohousing, Washington DC
> http://www.takomavillage.org
> 
> 
> 
> 
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