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

[Sharon Villines (sharon]

> On Oct 6, 2024, at 8:49 AM, R Philip Dowds <rphilipdowds [at] me.com> wrote:
> 
> Coho Friends —
> 
> I agree with Sharon most of the time … but in this case, I think I’m 
> somewhere else.  See below ...

Not so out of agreement, I think.

> I have several reasons for foreshortening the perspective: [ from 100 to 30]
> 
>     • Proper maintenance, and strategic capital replacement, can keep most 
> buildings in service as physical artifacts for hundreds of years.

This is true and the useful life predictions shouldn’t be used as truths. You 
can make things last much longer than predicted with good maintenance by 
choosing replacements based on longevity and ability to repair rather than low 
maintenance shorter lived.

>         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.

Our original reserve study specialist in 1999 was an architect who specialized 
in sustainability. He explained the difference between residential buildings 
intended for profit vs families and communities intended for lifetimes. Condos, 
apartments, hotels, etc., are built to produce income. They routinely expect 
their buildings to last only 30-50 years and plan to completely rehab or tear 
down and rebuild in that time-span. They predict they will need to be “new” to 
stay in business. 

Families and cohousing communities build forever. They think in terms of 
generations and build for the next generation and the one after that. One could 
argue that cohousing communities don’t actually think in generations and don’t 
expect to be building for their children, but I do think communities build as 
if they are establishing a community that will continue, not one that will be a 
tear-down in 30-50 years.

The way that the 100-year graph was very helpful for us was educational. 
Members did not understand the long-range financial implications of 
construction and maintenance decisions.

>     • 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 …

One year our reserve specialists said the current inflation rate index was 18%. 
They didn’t use that rate for calculating over time but I’ve seen 
recommendations for using twice the general inflation rate for the construction 
rate. These are two big sources on construction rates.

RSMeans Data: https://www.rsmeans.com/products/online
Engineering News:  https://www.enr.com/economics

> 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.

The principle is that when units are sold, they are compared to market-rate 
housing in “perfect” condition. If a unit (via the HOA) is burdened with debt 
that amount should be subtracted from the value of the unit. Many real estate 
lawyers and agents are not as aware of evaluating the strength of the reserves 
as others. I knew agents in NYC who would not sell units in some buildings 
because they did not have a good reserves strategy. That was an important 
evaluation of a strong building. They kept up with the whole building finances, 
not just what was presented for the sale of one unit.

Agents build their businesses around repeat business and referrals, so a happy 
buyer results in good sales for 5-20 years. 

> 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. 

This reminder is always important, but it has too often been used to justify no 
planning or pseudo-planning. We’ve had members laugh at 30-year projections but 
a 30-year projection based on the best information available is better than no 
projection or just using a “big number” without any measure of probabilities.

> 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.

Yes, “special projects” replaced “capital improvements” to allow the donation 
to be used for large projects and events, not operations or small purchases. 
Our exercise room has come to be heavily used so we have had to upgrade to 
professional and semi-professional equipment. Instead of taking them out of our 
Replacement Reserves we used the Special Projects Fund. We used it to pay for 
catering at our 20th Anniversary.

>> 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 think it has to be a last resort and not used as a way to put off debts 
caused by poor planning. We have been fortunate that households struck by fatal 
cancers have also had insurance and nearby family members who could help. But 
other households would have needed relief from monthly dues of $500+ for less 
than a year until the unit could be sold. It’s a way to support a household 
without “forgiving” fees. It’s temporary with a clear exit. 

It’s really nice to have Philip on the list and that he spends time raising 
these questions and responding to questions. I know many new communities now 
hire professional cohousing consultants so they ask fewer questions but for 
those who can’t, being able to ask questions and get a range of answers is 
invaluable.

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