031 | HOA Q&A With Robert Nordlund

Remember your job, your responsibility you answer to the association as a board member. You don't answer it to individual homeowners. They control their own budget, they get to decide if they want to buy a new car, or stay in their used car or go to a higher level of cable service at their home. They can also decide to move out because it's getting too expensive. Your job is to the association to make sure they have the cash. They the association have the cash to do what they need to do to to run the association and keep it sustainable.

Common Sense for Common Areas exists to help all 2 million volunteer board members nationwide have the right information at the right time to make the right decisions for their future. This podcast is sponsored by four companies that care about Board Members Association insights & Marketplace, Association Reserves, Community Financials, and Kevin Davis Insurance Services. You'll find links to their websites and social media in the show notes.

Hi, I'm Robert Nordlund of Association Reserves and this is HOA Insights where we promote common sense for common areas. Welcome to episode number 31, where our regular listeners will know time all by myself. Today, I'll be your subject matter expert spending some focused time on the subject of reserve studies providing some timely budget season q&a. It's an opportunity to share some answers to most of the frequently asked questions that come our way. I want to make sure our podcast audience is at the top of the class when it comes to knowing the basic building blocks of reserve studies and reserve funding. In case you haven't had a chance to listen, I want to encourage everyone to check out our last episode number 30, which was another of our popular board hero episodes featuring hardworking, underappreciated volunteers, just like you. This podcast is all about encouraging and equipping board members, raising them up and honoring them for the work they do carrying the entire community association industry on their shoulders. Well, if you missed any other prior episodes, take a moment after listening today to subscribe to this podcast on any of the most popular podcast platforms. You can also listen directly from our podcast website, www Hoainsights.org, or watch on our YouTube channel. And if you have a hot topic, a crazy story or a question you'd like to have us address in a future episode, you can contact us at 805-203-3130 or email us at podcast@reservestudy.com. So let's begin with one of those questions from our audience. Jeff in Indianapolis, Indianapolis, Illinois, Indianapolis, Indiana, who says why fund reserves at all? Nobody likes it. It just makes our dues go up? And the answer is well, yes and no. But it is a great question. It's a good tough one. And it's appropriate that we get that one out of the way boards, homeowners and right now legislators need to understand that the expenses are going to happen. There's nothing reserved funding has to do with expenses, their expenses are going to happen. Let's talk about a roof project, a roof is going to fail generally on schedule on budget, whether you fund reserves or not. So what we're talking about here is the choice that boards have to fund reserves on an ongoing basis. Your choices to do that, or wait and get hit with a special assessment at some future point in time when there's no money in reserves. So the only choice is when you pay for the reserve projects. Not if you pay for the reserve projects. So homeowners are going to pay one way or another, the dues don't go up. Or I should say it doesn't get more expensive to live in the association, you're just paying a little bit per month on an ongoing basis, offsetting ongoing deterioration instead of closing your eyes, and pretending that it's not happening, and waiting until the inevitable day that you get hit with a special assessment. So the bottom line is making reserved transfers does not increase the cost of living in an association. All it does is make the special assessments go away. And it maximizes on values. And I'll get to that home values question a little bit later on. But I want to start with some terminology to make sure we're all on the same page. And words matter. And so it's important that we choose words that say serve us well. And we start out with reserve contributions. That phrase is getting out of favor. The tragic collapse of champlain tower south in 2021 made it very clear that there's nothing optional about deterioration. And there's nothing optional ab out the board's responsibility to offset that ongoing deterioration and try to do what they can to take care of the common areas. So more and more, you're probably going to hear in conversation or see in your reserve studies that reserve funding is called that reserve transfers, funding requirements, things that have to do with characterized reserves as paying the ongoing bill of deterioration, the roof is deteriorating every month, the asphalt is the elevator is the paint is all your common areas are deteriorating. And rather than just wait 20 years, or 25 years, or however long it is for that project. It's all a matter of offsetting ongoing deterioration, so everyone pays their little fair share each month. And so in the future, when the project needs to occur, you get a the roof starts to leak, the asphalt starts to crack all these kinds of things. You wonder, Oh, no, this is horrible. But you look and by golly, you've got the money in reserves, and you do the project, and you keep your association looking nice. That's reserves done well, anyway. So long story, you're going to see less talk about reserve contributions, and more about funding requirements. I also want to talk about different types of reserves studies, there's basically three types of reserve studies, they are called the full with site visit, and no site visit, sometimes they're called level one, level two, level three. It's like at most gas stations, you have three choices of gasoline, three levels of gasoline to pick from the full reserve study is a create from scratch, where it's everything at your association is measured, it's inventoried, and we calculate or literally measure, you've got 80,000 square feet of roofing, heart, and 52,000, square feet of asphalt, whatever the numbers are five floors of carpeting, square yards of carpet, all that kind of stuff. Once we've measured that, you really don't need to hire anyone to re measure those assets. And that's the difference between a full reserve study, and a with site visit update. In the United States, right now, most reserved studies are with site visit updates, because that full has been done. And associations are updating their reserve study. And we'll get to best practices on that. So that's the full, that's the with site visit, update, where we go, we put our eyeballs on things we inspect we evaluate, we see how the asphalt is doing, we see how the carpet is doing all those types of things. And if something is new, or if the board re characterizes something, we make that minor adjustment, if the furniture by the pool used to be an operating account issue, and they're realizing that's not cutting it, and they need to get all 252 pieces done all at once in a nice matching set. Certainly, we can add that to the reserve program and get that taken care of through reserve funding. So we're site visit captures those ongoing updates. At Association reserves, we talk about an update being the opportunity to make the reserve study a little bit better. So it's going to be a little closer tuned, a little closer adjusted to your association. The update, no site visit is the very inexpensive level of service. It's great for times of high inflation. It's great for those in between years, where maybe you didn't make all your reserve transfers, maybe you're now getting more interest on your reserve funds. Maybe a project got delayed or it came forward or was more expensive or less expensive than you anticipated. That's a great reason for a no site visit. reserve study update. Okay. We're gonna be careful with where its reserve funding is cash moving to the reserve fund. percent funded is a measure of cash in the reserve fund. It's like your reserve balance, how much do we have? And percent funded is the evaluation of your current cash to the current needs of the association. I want to make a very clear, percent funded is not a measure of how much your funding reserves present under it is a measure of the cash in the bank or cash out In various different investment vehicles, percent funded is also not a measure of how much cash you have compared to the total replacement cost of all things present funded is the measure of the cash that you have, compared to the needs of the association. At this time, full funding is pursuing a goal of being eventually fully funded. So fully funding is a verb, it's an action phrase, we are fully funding our reserves, we're going to be fully funded someday. That's what that is. Being fully funded means you're there, you are at to your reserve fund is at or very close to 100% funded level. And that's, again, a measured size of the reserve fund. A couple more terms, capital improvements. A lot of people talk about reserves being for all their capital improvements, capital replacements, capital repairs, we need to be very careful here. Because capital improvements, when we're talking about reserve studies, is a new asset added to the association. It's like adding a pickleball court or adding electric vehicle charging station, that's a capital improvement. It's not a capital improvement to resurface the roof. It's not a capital improvement to resurface the asphalt, those are reserved projects. And then best practice best practice is to update your reserve study performed. That was site visit update every third year. Again, that's something that came out of the collapse of champion tower South National Reserve say standards were updated. I was a two year process 2021 2022. They finally were published here in 2023. You can see those on the caionline.org. website. If you have any questions at all, email podcast@reservestudy.com, I'll make sure you get the link. But clearly best practice at this time is a with site Visit update every third year with a no site visit updates in the in between years. And if you say it's not required in our state, or a reserve study update is only required in our state every fifth year. This is updated information, we're talking about what's best for you and your association. Want to make sure you don't get behind the times with respect to inflation. We want to make sure you don't get behind the times with respect to knowing how much you need to be setting aside to offset ongoing deterioration. Now, the big question, operating versus reserves? How would you determine what's what? Well, number one, you look at your reserves study. And number two, if you're not seeing it clearly there, talk to your reserves study professional but they are going to tell you about the national reserves a standard three part test. So for something to be funded through reserves, it needs to pass all elements of the three part test, which is needs to be a common area maintenance responsibility needs to be reasonably predictable in scope, and timing. And number three, it needs to have a repair or replacement costs that is material to the association, meaning so big, they would bother the operating font there would be impossible to absorb it into the operating fund. So that's a three part test. Another distinction is usually with the operating account, you get monthly bills for those things, you get a monthly bill for not monthly, but you'll get a bill for insurance, you'll get a bill for all your utilities water power, you'll get a bill for management, you'll get a bill for the pool service, the janitorial service landscape service, you get regular monthly bills for that. Now, the roof, and the asphalt, they're all deteriorating very regularly over their 20 or 15-20 25-30 year life. The reserve funds typically don't get monthly bills from those components, but they are deteriorating every month just like everything else. And reserves is in effect paying that monthly deterioration bill. So very real bill. If like any other bill, if you ignore it, it doesn't go away. It'll just pile up and hit you like a two by four with reserves means a huge special assessment. If you forget to pay your management bill for a month or two, you'll probably get a strongly worded letter from your management company saying you need to pay or we're going to stop providing service. The roof doesn't really stop providing service. It doesn't threaten it just keeps on going until it eventually fails. And you'll have 100 or$1,000 bill or $500,000 bill or whatever it is for your association. Okay, cost of a reserve study, how do you pay for reserves? There's so many associations are just facing this. For the very first time, we've heard a reserve study is good. Our attorney has said we should get a reserve said your management company has said we should get a reserve study the association across the street got a reserve study, they say now they know what they should be doing. So what do you do? Well, the cost of a reserve study is usually below that level of materiality. So it's usually paid from the operating account. Just like another professional service, if you need to retain the services of your attorney to help with a delinquent owner, a homeowner or an interpretation of what common area is, you don't dip into reserves for that. That's just an ongoing professional expense. Okay. I alluded earlier to the relationship between reserves and home values. And you'll see some articles on our website, reservestudy.com. For those of you who don't know, I'm I represent Association reserves. We've prepared actually, we're just about to cross 80,000, reserve studies for community associations in all 50 states. And on our website, www dot reserved a.com. We have a deep library of resources. And one of those things is actually a few articles on home values. We did a study, I think it was 2017. And I presented those results at a CAI national conference. And basically the results were We were wondering, does a well funded reserve account make any difference in home values? And the answer was a resounding yes. Answer was sure to check beforehand. It's either 12.6 or 12.7%. increase in home values for a condominium association. Basically, we've all heard the idea of curb appeal. Well, curb appeal folks is real. When you have sufficient reserves to take care of your common areas on a timely basis. Meaning everything gets painted, the carpet gets replaced, the roof is watertight. Basically, the place looks shipshape, that transfers into higher home values. And we did that it was a test of about just under 100 associations. And we normalized it for a local, consistent geographic area. And we also normalized it per square footage. So we weren't mixing in three bedrooms versus two bedroom condos. So I was wondering what the data was going to say. But the data said, strong reserves make a difference. And that's, again, just the matter of curb appeal. When the association has the money to take care of things in a timely manner. It reflects well in home values. And that makes reserve funding. All of the reserve transfers look small. Reserve transfers normally for an association are in the range of about 25% of your overall budget. That sounds like a lot. But when you compare it to 1000s and 1000s of dollars 12.6% of your home value, it becomes trivia, and you realize, Wow, this is some of the best investment I can make. So if you have a $500,000 condo, and you're trying to talk to homeowners into funding reserves appropriately, I'll get to that in just a minute. Tell them how nice it would be if all their homes were worth 10% More, that's 50 grand. And all of a sudden that extra $100 A month starts to sound pretty darn small. So there's a correlation to home values. One more question and we'll take a break. But we have regular questions about painting and tree trimming. And people saying that we can't fund for painting and tree trimming and pest control things like that because the IRS says they are non capital projects. And that's great. IRS can say whatever they want to say. The idea is that you do your reserves according to reserve say standards, and you file your taxes according to IRS standards. And as I said a moment ago, reserves a standard say if it passes a three part test. It's a reserve expense. Basically the big elephants in your budget the big unsettling projects the big unsettling predictable projects that are coming down the road, whether they are painting, which IRS says is non capital or a roof replacement, which the IRS says is capital. Those are things that are in the best interest of your association to prepare board through reserves again. So when the time comes, your association will be ready. So let's now take a quick midpoint break to hear from our sponsor, and we'll be right back.

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And we're back or we're back to q&a with Robert on reserves. And let me get to the next one. The next one is what if homeowners don't want to fund reserves on an ongoing basis? They'd rather wait and be special assessed? Well, let me spend a moment on this. And it's an important question just like a very first question that we started out with at the top of the program. Remember that not all homeowners are prepared for special assessments, the average American doesn't have much in savings, they're not prepared to be hit with a 1000 or $5,000 special assessment. So you have to be real careful that you're making decisions that are in the best interest of the association, not a subset of homeowners homeowner members who would rather sit on their own money, not a vocal minority. And it all depends on who controls the budget. controls. The budget is defined typically by governing documents, sometimes by state law. And of course, it's also controlled by principles of fiscal responsibility, which applies to board members. So if the board is required by the governing documents to set the budget, and that's pretty much the end of the story, right there. Doesn't matter what the homeowners say, it doesn't matter what the homeowners feel the board is responsible, it's their job to set the budget to offset the expenses at the Association. As I'm reminded you earlier, those expenses at the association are real, even if you don't get an actual invoice each month from the roof. So ongoing deterioration is a real bill. If the homeowners in your association or state do have input, then there's two things. One is that the board has to put on their salesmen hat and start making the pitch that this is the responsible way to fund reserves. It's predictable expense. And it's going to prevent special assessments. It's not going to make our life here at the association. Any more expensive, the roof is going to fail when it wants to. The only question is are we going to fund it a little bit per month, whatever the number is at your association, $54.72 or $127.13, whatever the number is large or small. Again, it's often in the range of a quarter of your overall budget. All that does is prevent special assessments in the future. And those are the exact funds that will allow the association to make timely repair and replacement projects happen. And prevent special assessments prevent deteriorate, deferred maintenance, prevent things from looking lousy maximizing owner enjoyment and again, maximizing home values. So it's all it's all good for the association. Remember, sometimes it might mean that you raise assessments at your association. And there's a vocal minority who isn't happy with that. And remember your job, your responsibility you answer to the association as a board member, you don't answer it to individual homeowners. They control their own budget, they get to decide if they want to buy a new car or stay in their used car or go to a higher level of cable service at their home. And they can also decide to move out because it's getting too expensive. Your job is to the association to make sure they have the cash, they the association have the cash to do what they need to do to to run the association and keep it sustainable. Okay, another good one. Why should we trust a reserve study? Who knows what will happen 20 or 30 years in the future? And I like that. For those of you watching on YouTube on my bookcase over here, I have a little crystal ball. Sometimes I use that in the presentation too, as a prop. But no there's no crystal balls in reserves days what we do are make informed observations. And sometimes we also enlist and trust the report of a rougher paint or asphalt company or Earlier today, I was speaking to a dock rebuilding company for a waterfront property. It's not something that we touch all the time, it was great to get some insights from the dock company. But basically, we trust the normal repair and replacement cycles. We see, as we've said a little bit ago, done over eight are right around 80,000 reserve status now, those things are real. Everything deteriorates pretty much on schedule, pretty much on budget. And so we plan, those are big expenses that are going to happen. A year reserves a provider, whether it's Association reserves or another provider, we see these things every day, we have a good perspective on these things. We are basically inexperienced II. So remember that best practices are to update your reserves at regularly. We have zero expectation that we're going to prepare reserve study. Say thank you very much that fun serving you and come back 20 years or 30 years from then and see what happened. No, we expect that you are going to need to update your reserve say regularly, if not annually, and every third year to tweak those evaluations to tweak the pricing to tweak your funding to make sure that you adjust your plan along the way. There's no preparing a reserve study and then waiting 20 or 30 years. Okay. There's usually a lot of questions we get from our Florida clients. A lot of legislation has been buzzing. There's more proposed legislation here in the late 2023 for 2024. And my recommendation is to please visit our website. That's again www.reservestudy.com Go to the get in touch tab, select regional offices select Florida and about midway down that page, you'll see a FAQ on Florida specific legislation, great group of answers they're most likely to answer all your questions about do we need to be fully funded by a certain date? How are we going to afford all this type of stuff? What about service components? SIRS? For everyone non Florida that structural integrity reserve study specific components? Many other questions like that, we hit the nail on the head with our FAQs. And I think we have time for another question or two. I'm going to pick one from a recent webinar. Oh, how do we handle large but unpredictable expenses such as an elevator breaking unexpectedly. And before I go too far, that is another great resource we have at reservestudy.com, you can select resources, and then webinars. And all the webinars we do we do webinars monthly. Not only is their encore presentation online, you can watch it on YouTube. But we have a long list of FAQs that you can page through and learn a lot of good things. Everything we do is according to National Reserve Study standards. So it's not just an association reserves of viewpoint on things. It's national standard stuff. But let me get back to that question. It was on elevator, what do we do about an unpredictable expense as an elevator breaking? Well, elevators don't just break, older elevators start to have more and more frequent service calls. That's the purpose of a reserve study is to see that big expense coming and prepare you financially. Right now elevator work is very expensive, it's gone up significantly. And that is stressing elevator service companies, their turnaround times are getting long, like six months. And you don't want to be in the situation where your elevator goes down one of your two elevators, or maybe your only elevator, where it goes down. And it's going to be down for six months. So look at your reserve study. Find out when your elevator is getting close to modernization. That may be one of those projects that you want to execute a little bit on the early side. To make sure the project is in place. The parts are in place. And you can get that elevator modernized with minimum downtime. I'm currently working on one reserve study on client in my personal portfolio that has two elevators. They modernized one elevator, I think was four years ago, maybe five years ago, and they're getting ready to modernize the second. There's a lot of wisdom in that. splitting things up and so cut the cost in half. Make sure they have an hour fresh go A new technology elevator. And they'll get to the second one in another year or two, we'll probably end up being. And I could go through so many questions here. I wanted to give you the high points. I'm looking at the clock. It really is time to close out this session. We want this podcast HOA Insights: Common Sense in Common Areas to equip you to make great decisions on behalf of your association. And making wise reserve planning and reserve funding decisions is a key part of your responsibility. We don't want you to get hit with surprise special assessments life is hard enough without special assessments. Want to help you be prepared for the largest expenses your association will face. And although sometimes it seems like it's a big utility bill, or right now insurance bill, the largest expenses are your major reserve projects. So get prepared. We hope you learned some HOA insights from our discussion today that helps you bring common sense to your common areas. We look forward to having you join us for another great episode. Next week.

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