Three Ws of HOA Reserves

Written by Posted On Tuesday, 12 September 2006 17:00

Reserve studies are one of the most powerful planning tools in an HOA board's arsenal. It provides a 30 year schedule for major repairs and replacements and a funding plan so the board can gather the gold it needs to get projects done as they come due. It's a wonderful thing.

However, a reserve study is a moving target. Some of the underlying assumptions in the study change from time to time, like:

  • Rate of inflation

  • Yield on invested funds

  • Costs of materials

  • Cost of labor

No one has control over these elements and those triggered by the Three Ws: Weather, War and Weality (a bit of alliterative license with "reality"). Life in various forms simply happens and can have a dramatic impact on financial forecasts like reserve studies. So, all reserve studies need to be reviewed and revised each and every year to remain accurate.

Not all reserve study update factors carry the same financial weight and impact. The skewing of inflation rate and investment yields alone can swing a medium sized reserve fund hundreds of thousands of dollars over a thirty year period. For the most current inflation rate, go to www.inflationdata.com .

While none of us can control inflation, maximizing the rate of return on invested reserves is directly in the hands of the board. Where the HOA does its banking is usually not the best place to invest reserves. There are a variety of financial institutions that offer better than average bank rates for CDs. Increasing the yield on reserve funds one or two percent can generate thousands of dollars in interest revenue. For options, see www.bankrate.com

When actual reserve related projects take place, they produce actual costs. When, for example, exterior painting is done, those actual costs need to replace the budget figures in the reserve study. When known industry cost changes have taken place, like sealcoating the parking lot is now $.20 per square foot instead of $.15 per square foot, that information should be updated as well.

As of January 1, 2006, the State of Oregon requires that a "maintenance plan" be included with all reserve studies and reserve study updates. The maintenance plan is intended to explain what is meant by, for example, "Paint-Exterior." What is the scope of work is being performed and who should do it?

Maintenance plans for garden variety condos are relatively straight forward while high rise buildings require more of a "maintenance manual" which can be followed by a professional facility manager or building engineer. The State leaves it up to the board to decide what the law means by "appropriate to the size and complexity of the common property." But whether the maintenance plan is brief or voluminous, all Oregon reserve studies must now include one. This is a first in the nation and adds another dimension to the evolution of reserve planning.

The message is clear. If your HOA doesn't have a reserve study, it needs one for the board to properly manage the common elements. If you have one, make sure to review and update each year to make sure it remains accurate and include a enough information in each reserve component description so future boards will understand what they are expected to do.

For more on reserve planning, see Regenesis.net .

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