Condo Media - August 2020 - 25

FLAWED PHILOSOPHY
Often, unit owners feel that the replacements are so far in the future, they may
not still be part of the community and see
no value in paying for what will benefit a
future homeowner. They may grudgingly
accept the cost of living increases in
the annual operating budget but
actively protest funding for
future capital replacements.
They are skeptical about the
need for the replacement,
("We don't need to replace
the roadway, we can just
patch the pot holes.") or they
dispute the amount of money
being put aside for the project
("My brother-in-law owns a
construction company and he
says it should cost half as much
as you are projecting.").
It is clearly much easier for the
trustees of a self-managed association
to make unit owners and themselves
happy by not being overly concerned
with the capital needs of the community and maintaining a short-term view
on funding requirements. By focusing
on replacements that might be necessary this year or next year, there is no
need to plan for funding expenses in
year five, ten, or twenty.
SHORT-SIGHTEDNESS
Shortchanging unit owners by considering simply the short-term needs of the
community and drafting and approving
a bare-bones annual operating budget
without supporting the reserve fund for
future replacements is a prescription
for disaster. Lacking a long-term view,
the board's ability to manage the cost
of the community's capital needs will
require calling on unit owners to come
up with big money when equipment and
systems fail. Worse yet, allowing common elements like parking areas and
sidewalks to deteriorate because there
is no money for necessary replacement
creates safety hazards and seriously impacts the curb appeal and market value
of each unit in the community.
Unit owners who smiled when their
condominium fees did not increase and
who boasted about it to friends with
higher fees will now be struggling to
cover the cost of a special assessment

of many thousands of dollars. And with
the impact of the deferred maintenance
on the current market value of their
unit, many homeowners may be without the equity that would enable them
to refinance or obtain home equity
loans to meet this obligation.
The trustees of a self-managed
board are unit owners who
volunteer their time to guide the
operation of their community.
Without the assistance of a
professional management team,
these volunteers are even more
tasked as they try to address the
challenges of the aging common
elements, and the particularities of unit owners who want
to avoid spending money. Since
self-managed associations often
have high owner-occupancy and strong
social interaction among residents,
these board members - who are usually
untrained in capital planning - are faced
with persuading their friends and neighbors to part with their hard-earned cash
to establish a healthy reserve fund. Is
it any wonder that they shy away from
the endeavor and take the low road of
underfunding the reserves?
EXPERT ADVICE
Fortunately, there is a simple solution
available to a self-managed board that
will help to convince homeowners of the
efficacy of preparing for the replacement
of the community's common elements:
reserve specialists. Reserve specialists
are experts in providing condition studies and capital planning tools, and they
are ready to assist with determining the
association's capital needs and creating
strategies for funding those needs.
A reserve analysis involves the close
visual inspection by a construction
specialist or engineer to both quantify
and qualify the condition and useful
life of the common elements under the
stewardship of the board. This inventory is expanded to include an estimate
of reserve funding needed to replace
these items based on their existing
condition, remaining useful life and
projected replacement costs. Most reserve studies also include an estimate
of an interest earning projection for
replacement reserves.

A capital reserve study will generally
provide the following:
A narrative description of the reserve
specialist's assessment of the complex
in an executive summary, along with
photographic documentation and
graphic presentations
A component-level narrative
summary of current condition,
expected life, and the justification
of these assessments
A listing of the common property
elements included within the reserve
schedule. This listing will also include
the assessment of the expected
remaining life of each
A depiction of funding scenarios utilizing both the component method and
cash flow pooling method of calculating capital reserve schedules on a 30or 20-year capital needs projection
A detailed schedule of capital
expenses by type and cost in the
year of replacement in addition to
an annual total expense report
Supportive graphs illustrating
the funding scenarios
A detail of all standards, references, and
methods used in generating the assessments of current condition, expected
useful life, and replacement cost
A description of the expected investment returns on capital reserves
and annual additions to and subtractions from these balances, projected
using agreed upon annual percentage
rate returns
Prioritization of replacement of common element items deemed
as critical projects
Joint review of the preliminary report
with the board
Presentation to community at an
owner's meeting to allow for Q&A
Updating of the inventory and funding
schedule as replacements are made
August 2020 CONDOMEDIA

25
Condo Media - August 2020

Table of Contents for the Digital Edition of Condo Media - August 2020
