Tag Archives: reserve studies

Best Practices, Budgeting, condo associations, Cooperatives, HOAs, long range planning, Reserve Studies, Strategic Planning

14 Things Your Reserve Analysts Might Not Tell You – And It’s Not Their Fault (Part 3)

Leave a comment

Two weeks ago,,  we shared five focus points to help you analyze property components. Last week, we offered another five, which were practical considerations to discuss with your reserve analysts in order to estimate project expenses as accurately as possible. To recap, we’ve covered:

1. Engineering Study for Stuff You Can’t See
2. Elements Impacted by Code Compliance
3. Piping Systems
4. New Construction Technology
5. Underground Piping and Wiring
6. Project Design & Management Expense
7. Logistics for Limited Access Projects
8. Collateral Damage
9. Items Outside Study Period
10. Strategic Improvements

We close out the series with the last four nuggets. These cover areas where the Board has a level of discretion and help you deal with some thorny cash flow issues.

11. Interior Renovation Upgrades: Interior renovations can take many forms. If you don’t tell your analysts what you have in mind, they are left to guess. For instance, I helped one client to plan for wallcovering, painting and lighting that would last through two cycles of carpet. In another case, the whole lighting plan was to be revised. That specific data had to be plugged into the reserve study.

12. Alternative Funding Options: If the community is behind the ball financially, debt service, special assessments, or a combination of the two might be options to consider. Clarifying the Board’s authority to do either and strategically planning to communicate options to members are absolutely crucial. This will no doubt be the subject of a future blog. Your reserve analysts should be able to help you to run “what if” scenarios, but you are going to have to tell them what those options might be.

13. Big Trees, Drainage & Other Landscaping: I’ve heard arguments that greenspace does not belong in reserve studies. However, mature trees and landscaping can be really expensive to remove, not to mention replace. Over time, surface drainage can become ineffective and might even lead to flooding. A review by an arborist, landscape designer or architect can be a real eye-opener. You can consult with your reserve analyst and auditor to confirm the appropriateness of including such items in the replacement reserve. If it gives either of them heartburn, you have an option. See #14 below.

14. Major Periodic Maintenance: I regularly see five-year electrical panel and switchgear maintenance in reserve studies. I even see the cost for future reserve studies in some reserve schedules. Even though these expenses may not pass the test as a reservable component, it makes sense to flow the funding evenly from year to year. Including such expenses in the operating budget could have significant impacts on fees. The fact that it’s on a schedule and in the financial plan helps Boards to maintain the discipline to actually tackle these vital projects. Depending on the property there might be other major periodic maintenance that is just as vital and has a similar financial impact. Hydro-jetting of plumbing stacks and laterals, dryer duct/vent cleaning, HVAC duct cleaning, and chimney inspections and cleaning can add up. There may be a couple of approaches to consider. If the property can be divided up with a portion of the work done each year, it would flatten out the expense. But if that’s not feasible, you might ask the reserve analyst to include such projects in the study. If the analyst (or the auditor as noted in #13) or the Board is uncomfortable with that approach, there is an option. You can create an operating reserve, set up a schedule of expenses, and calculate a monthly contribution to that reserve in the same manner as the replacement reserve. This will make sure the money is in the bank, keep you from deferring critical preventive maintenance, and even out the financial impact on association members.

Who & When?

We’ve identified a number of capital projects that may require additional professional support to properly plan and estimate replacement costs. Investing funds up front to work with a qualified, structural engineer, mechanical engineer, construction manager, construction estimator, project manager, elevator expert, fire protection system engineer, architect, or contractor can significantly mitigate the possibility of unhappy surprises and create a realistic funding plan. We’ve identified a few areas where legal and audit advice is advisable. Making this a point of discussion with your reserve analyst will help. Some firms that provide reserve studies are multi-disciplinary and may have some of these resources in-house.

The optimal time and depth of study will depend on the projects themselves. Hopefully this series has helped you to take a hard look at the components in your reserve schedule, do a risk analysis and take the holistic approach described in last week’s blog. Once you’ve identified elements that may benefit from further analysis, check the timing. Early on, perhaps you can get some inexpensive thumbnail estimates (hint – plan for the worst, guess high). If you are getting to within about five years of a large project, it might be time to make a more significant investment and hire specialists to take a deeper look. The more complicated the project, the more important this is.

Bottom Line

A truly comprehensive reserve plan can make all the difference in the financial health of a community association and the quality of life of its members. The reserve study is a tool. Your reserve analysts are your partners. See the bigger picture. The better the data, the better the study. The better the study, the better the plan. The better the plan, the better the execution of the plan. The better the execution of the plan, the better the community.

Best Practices, Budgeting, condo associations, Cooperatives, HOAs, Reserve Studies, Strategic Planning

14 Things Your Reserve Analysts Might Not Tell You – And It’s Not Their Fault (Part 2)

Leave a comment

Last week’s blog offered five focus points to improve the accuracy of your reserve plan. Nuggets 1 through 5 help you analyze property components. This week, we share nuggets 6 through 10. These are practical considerations to discuss with your reserve analysts in order to estimate project expenses as accurately as possible.

These all come from my experience working with clients through the years. In some cases, I noticed a disconnect between plan and execution. In their planning process they dutifully used the expense listed in their reserve study. However, once the project got going, additional necessary expenses that were not anticipated in the study were funded from replacement reserves. This made it appear that the projects were over budget, resulting in weeping and gnashing of teeth, not to mention death glares in the direction of their reserve analysts. The truth was that these projects were not over budget, rather they were under planned. In other cases, under planning occurred when clients failed to take a bigger picture or strategic approach to planning projects. The lesson is clear: The more accurately you can see the future, the better the odds you can get there.

Clients who implemented this week’s nuggets planned more realistically and utilized reserve funds to the maximum benefit.

6.  Project Design & Management Expenses: Wise associations elect to engage professional engineers, architects, and/or project management firms to develop specifications, facilitate the bidding process, and provide quality control for major capital projects. Depending on the nature and size of project, the investment can be in the neighborhood of allowing 10% to 15% of the total project costs.

Lately I’ve been encouraged to work with boards that understand the impact of major projects on their management team. Projects that impact residents in an intense way take human resources to make sure they run smoothly. Hiring additional staff or a professional project manager can make all the difference between a great project and one that sucks the life out of every resident, board member, and team member. Too many associations ignore the fact that without that support, something will give – the quality of the project, the quality of day-to-day operations, or both.

Reserve studies may not anticipate any of these expenses. You may need to direct that they be included.

7.  Logistics for Limited Access Projects: If something is hard to access, it’s going to be more expensive to replace or maintain. Sometimes A LOT more expensive. Getting a handle on those costs can be crucial to estimating the total price tag of a project. A cooling tower on top of a 27-story high rise is going to cost exponentially more than one on the ground floor. If a building elevation presents challenges in accessing a roof, the costs of roof or gutter replacement and periodic major maintenance on components like soffits and trim go way up. Contractors and construction estimators can be lifesavers in helping to avoid some gnarly surprises.

8.  Collateral Damage: This can be a tricky one. Technically, the association may have limited or no responsibility for replacing unit components. But what if they are altered to access common element replacements like pipe risers? My favorite example to illustrate the point: Let’s say the only way to replace a piping system is to go through 1950’s era ceramic tile. You’ll never match the old tile. Will the Board repair the plaster only? Tile one mismatching wall? Or replace all the tile in the unit? Multiply the expense by all the units in that tier. The answer might make a significant impact on project costs. Here, your first call may be to association counsel to be clear on your responsibilities and options. Then you’ll have to make a business judgment. Just don’t wait until you start the project to decide. Get clarity in the planning process and plug the info into the reserve study. That is not your reserve analyst’s responsibility, it’s the Board’s.

9.  Items Outside Study Period: Many studies include only those components that have useful lives within the period of the study (usually 30 years). The rationale is that if you conduct studies every three to five years, the component will eventually make its way into the study. But some major components such as electrical switchgear, transformers, or piping systems may have useful lives of 50 years or more and they may be major expenses. Waiting to fund those expenses over only 30 years could create a big bump in required funding levels when they magically appear in the study. Plug them in now.

10.  Strategic Improvements: Instead of replacing components in kind, it might make sense to rethink and plan. For instance, a property may have high-maintenance components such as wooden exterior soffits, fascia, and rake boards. These require repainting every few years and eventually sectional or full replacement. It might make sense to replace them with low-maintenance materials. More expensive up front, but much less expensive in the long run. Original gutters might have been undersized and should be replaced with larger ones. If gutters and downspouts are being replaced, it might be the golden opportunity to replace wood trim with low-maintenance material. The Association could pay only once for mobilization for two projects and save money in the long run. Better yet – think strategically and tie these projects in with the next roof replacement to get to best bang for the buck. Take a step back and see property components in a broader context. Adjust the plan accordingly and make sure the data gets plugged into the reserve study.

Perspective

No one wants to increase fees. It can be tempting to ignore the potential for additional expense, even if it means losing out on savings in the long run. Making the best use of members’ assets is a key element of the board’s fiduciary duty. Think strategically, plan wisely.

“Leaders keep their eyes on the horizon, not just on the bottom line” –Warren Bennis

Next…

Next week we close out this series with the last 4 nuggets. These will help you to recognize areas where the board has a great deal of discretion in the planning process. Many community associations are facing the tough realities of under funding and have to include options such as loans and special assessments in their funding plan. We will help you to partner with your reserve analysts and other professionals to develop scenarios and choose the best plan for your community.

Budgeting, community associations, condo associations, Cooperatives, HOAs, long range planning, Reserve Studies

14 Things Your Reserve Analysts Might Not Tell You – And It’s Not Their Fault (Part 1)

2 Comments

Reserve studies are invaluable tools for condominiums, cooperatives, and homeowners associations. Used properly, they assist boards and managers to make good decisions for reserve funding with long range planning in view. They also help to plan for near term capital projects. The reserve study provides a basis for a systematic and disciplined approach to reserve funding and capital project planning.

At the same time, I’ve heard too many complaints from clients through the years about accuracy of the data included in their reserve studies. This tends to occur when unpleasant and unplanned realities throw a monkey wrench into the best laid plans. I’ve found that either an unrealistic expectation or a poor understanding of the study process are typically at the root of the issue. This series of 3 blogs helps to address the first issue. I’ll provide tips on how to work with your reserve analyst in another blog soon.

What a Reserve Study Is…And Isn’t

Professional reserve studies have two components – a physical analysis and a financial analysis of major property components. The physical analysis helps to estimate the remaining useful life. The financial analysis turns it all into an actionable plan to recommend a funding level that ensures the Association will have enough money in the bank to replace components when needed. For more details, you can review CAI’s National Reserve Study Standards, and the Association of Professional Reserve Analysts Standards of Practice.

Reserve studies are relatively inexpensive as compared to other engineering analyses. There are reasons for that.

  • Reserve analysts are by definition generalists engaged for the specific purpose of creating an overall financial plan. They do not undertake the detailed condition reports, basis for design, or specifications that a specialty engineer may create in preparation for a particular capital project.
  • Reserve studies do not include destructive testing. No walls will be opened, ground dug up, or other means to get into the details of conditions unseen.
  • Reserve analysts are neither omniscient nor clairvoyant, nor do they possess X-ray vision. You’d have to pay a lot more for that!

Throw Me A Bone, Man!

The good news is reserve analysts LOVE data. The more valuable information you can give them, the more they will plug into the study. The better the study, the better your plan.

Here are a few nuggets you should consider feeding to your reserve analyst. Complicated condominiums and cooperatives, especially high rises, are more likely than HOAs to benefit from the additional data points listed in this blog series. Regardless, it’s worth taking the time to consider whether each of the 14 nuggets factor into your association’s reserve plan. I can tell you they’ve either saved my clients a lot of heartburn, or I learned about them because of my clients’ heartburn!

These first 5 nuggets deal largely with building components. The next 2 blogs will address discretional expenses, practical project planning, and approaches to thorny cash flow issues.

  1. Engineering Study for Stuff You Can’t See: This could apply to components like waterproofing systems under patios, parking lots, green space, fountains, etc. Without doing destructive testing and taking a look at what is underneath, you may have no idea how much it will cost to design and replace a system you can’t see. You will likely pay far more for this engineering study than you will for the reserve study, but it will be well worth it. One client’s reserve study had estimated system replacement for four garages to be $500K. When it was all said and done they paid about $1.1M…. per garage! The information gleaned from their engineer’s work helped them to prioritize and pay for the project. If they had that information up front and included in their reserve study they could have avoided sticker shock.
  2. Elements Impacted by Code Compliance: The typical reserve study assumes like-for-like replacement. However, local code may require a building to upgrade an old system to meet current codes, exponentially increasing the cost of some projects. This is particularly true of fire protection systems and elevators. Getting cost projections from sources familiar with local codes can save you from ugly surprises.
  3. Piping Systems: No pipe will live forever. Yet, I have seen common piping systems omitted from reserve studies for whatever reason. Also, determining the remaining useful life of copper piping is easier than ever before thanks to non-invasive technology. Obtaining a pipe condition study for domestic, HVAC and waste piping can provide invaluable data.
  4. New Construction Technology: Sometimes new building products or construction techniques can post a challenge until there is a track record of periodic major maintenance, rehabilitation or replacement. Installing contractors, architects or engineers involved in the new construction can sometimes provide some insights to help plan for future projects.
  5. Underground Piping and Wiring: This can be a big one for garden communities, especially those built in the 1960s as apartments, and particularly those with central HVAC plants. I don’t always see underground electrical feeds, HVAC piping, or domestic water piping in reserve studies for communities that have these components. Tracing a break or a leak, digging up between buildings to replace a section of wiring or piping and restoring the grounds on an emergency basis is an expensive proposition. It is surprising how much electrical wiring has been laid in the ground without being run through conduit. This can even impact the planning for replacement of light poles. Identify the risk and make a plan to include in the reserve study as needed.

Hard Reality

In some cases, the engineering and design costs outlined in the 5 nuggets above might exceed the cost of your reserve study. But that’s irrelevant. Think about the impact of not having the data. Underfunding by any means is a bad strategy.

When & Who?

In the third and final blog in this series, we’ll identify potential resources and factors that will help the Board to decide when to reach out.

Next…

In next week’s blog, we will discuss data points related to practical considerations when planning for projects. I will again reach back into my bag of experience to find the things that made a huge difference for my clients through the years.