The natural consequence of this kind of unpopular action is for most boards to dodge and weave, defer and delay. What’s a year or two more going to matter? And, by next year, the directors might be able to sell their units and avoid the unpleasantry altogether. Meanwhile, Rome burns.

Deferring maintenance always costs more money and dampens home sales. When your HOA is caught in this kind of quagmire, it’s best to hire a Professional Reserve Analyst (PRA) that can prepare a proper reserve study and the case for urgency. A PRA doesn’t have the political problem that board members do of being neighbors. A PRA can explain the cold hard realities of raising the funds and getting the job done or the dire consequences for failing to do so.

A PRA can also recommend material and design upgrades to reduce repair and replacement costs plus interval maintenance that will significantly extend the useful lives of some components. With longer lives, comes reduced owner contributions.

One oft overlooked advantage of effective reserve planning is strategic investing of the funds. The study reveals when funds will be needed and thus allows available funds to be invested for longer terms and higher yields. An increase of only 1-2% in investment yield can often lead to hundreds of thousands of dollars in additional interest earnings over the projection period. Every dollar of interest earned is one dollar less of owner contribution. It’s like having someone else pay the freight.

One option that HOAs consider to finance urgent repairs is bank loans. When HOAs borrow money, it’s considered a commercial loan and both the rate and loan fees are considerably higher than home loans. These loans are typically short term (five to ten years) and HOA loans require monthly payments just like any other. The lenders require much hoop jumping to get them. There are only a few lenders that will do them at all. There are situations when borrowing money is called for (like unanticipated and hugely expensive urgent repairs) but there’s simply no free lunch and this one comes at a premium price. If certain owners lack the cash to fund an urgent special assessment, it’s much cheaper to get a home equity loan or even draw on a credit card. Home equity loan interest is deductible for this purpose.

For a variety of reasons including disability, divorce, retirement and long term unemployment, some HOA members may not be able to fulfill their financial obligations to the HOA. But consider this: shelter is only trumped by food as a life priority. If a member is unable to afford HOA expenses, it may be time for a lifestyle adjustment. The HOA simply cannot fulfill its financial obligations when it plans around or concedes to the weakest link. While this sounds cruel, remember that there is no government bail-out for HOAs. If some don’t pay, the rest must. If the Board can convince all the members to subsidize someone down on their luck, well and good. Otherwise, the Board should press for collection just like the IRS, and the sooner the better. Most members can come up with their share of cash when pressed. For the rest, it may be time for a heart to heart about downsizing.

All things wear out sooner or later. A reserve study analyzes those assets that the HOA is responsible for, projects future costs, current funding needs and a schedule for keeping the assets in good repair. The approach is fair to all owners, now and in the future, and ensures repairs are done when needed. Result: happy members with sustainable home values.

Ignoring the obvious has obvious pitfalls. Sooner or latter, the inevitable becomes unavoidable. As the saying goes, "If you find yourself in a hole, stop digging."

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.

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.

Of general interest, as of January 1, 2006, the State of Oregon requires that a "maintenance plan" be included with all reserve studies and reserve study updates. While loosely defined by statute, the maintenance plan is intended to explain in some degree of detail what is meant by reserve components labeled, for example, "Paint-Exterior". In other words, what 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.

A reserve study is one the board’s most value tools. Keep it sharp by reviewing and revising it each and every year.  BACK

If your homeowner association has had a professional reserve study done, make sure it is updated every year. Also, remember include the cost of the reserve study update in your Operating Budget so you won’t overlook doing it every year.

If your HOA has not had a reserve study done, put it on the To Do List for the coming year. The reserve study is one of the most indispensable planning tools that every HOA Board should have. Not having one is like steering a ship without a rudder. For more information on the reserve study process and cost, consult with a member of Association of Professional Reserve Analysts. For details, go to www.apra-usa.com  BACK

When something fails, it fails, doesn’t it? Well, sometimes, sometimes not. A constantly leaking roof has clearly failed. But when do you decide that the gold shag carpet in the clubhouse has "failed"? Should replacement of the pool heater be handled differently from the boiler that provides hot water to the entire HOA? In the field of Reserve Studies, there are five general categories of failure modes.

Regular. Components in this category are items like siding painting and asphalt seal coating. These components require regular rejuvenation or the homeowner association will face significant related repair or replacement expenses.

Watch & Decide. Fencing is a typical component in this category. The gradual approach of failure may be apparent, but the actual failure point may be delayed or accelerated due to weather or maintenance. Replacing selected boards and posts may buy several more years of life than the average.

Benign. Components in this category are non-critical components such as pool heaters or clubhouse trash compactors. It is not a problem to stretch out the life and wait until the component fails, because the HOA can survive a few days without the component.

Catastrophic. The HOA depends on these components: main hot water boilers, elevators, entry access systems, etc. Failure of these components causes significant expense or disruption and often happens when the repair contractor charges double time. Being proactive and repairing or replacing them before failure is wise.

Obsolescence (technological or aesthetic). These components have live longer than they should because even though worn and due for replacement, they still serve an adequate function or are low priority. The gold shag carpet in the clubhouse, the outdated appearance of the elevator interior, and the old single floppy monochrome monitor PC used by the on-site manager are three good examples. Landscaping is another often overlooked item that becomes aesthetically obsolescent. New drought tolerant and pest resistant native species have been developed that not only improve curb appeal, the significantly reduce maintenance and water needs.

Ideally, the HOA should fund reserves at a high enough level so that all reserve components are repaired or replaced when due. Member home values suffer when the common elements appear worn or outdated. However, when reserves fall short, decisions must be made. Understanding the different reasons why to replace a component helps that process.

Excepts from an article by Robert M. Nordlund, PE, RS.  BACK

Excuse #1: "I didn’t get what I paid for so am withholding payment." Members have a right to require the board to perform its duties but withholding assessments is not the way to do it. The obligation to pay HOA fees has nothing to do with the HOA’s obligations to provide maintenance and service. A member that withholds payment becomes delinquent and should incur all penalties provided for in the HOA’s collection policy.

Excuse #2: "You didn’t bill me." The requirement to provide invoices is rarely found in the governing documents, however, HOAs are generally required to send the approved budget to each member annually which should also contains notice of the HOA fees owed.

Excuse #3: "The HOA has no right to make me pay for common area upkeep." Actually, the board not only has the right, it has a duty to collect assessments. This authority is established in the governing documents and state statutes. When people buy into a homeowner association, they agree to abide by those documents and that includes paying assessments.

Excuse #4: "I never use the recreational facilities and shouldn’t have to pay for them." Admittedly, recreational facilities are expensive to operate and for some HOAs represent a large part of the budget. Nevertheless, the obligation to pay for a common amenity has nothing to do with the level of usage. Many move into an HOA specifically for the recreational amenities. They’re willing to pay for them because they take full advantage of the opportunities they provide. Even if you’re not using some of the amenities, they make the community more desirable and the homes more valuable. Those that don’t use the facilities should consider whether an HOA without amenities might work better. If so, it might be time to move.

Excuse #5: "The HOA fees are too high." HOA fees reflect the cost of maintaining the common elements. All have to pay their fair share. If the HOA fees are too high, where can money be saved? The board should be open to ideas on reasonable ways to cut costs. But simply lowering fees because someone wants to pay less is not reasonable.

Excuse excuses. Many try to cash them at the Bank of HOA. Like a bum check, the HOA should refuse to accept them.  BACK

It doesn’t take a fortune teller to predict that common elements are going to wear out and it doesn’t take a crystal ball to predict that HOAs are going to need money and a plan to fix them. So why do so many HOAs fail to properly plan for these predictable events and expenses?

The truth is that too many HOA boards are busy putting out this year’s financial fires and haven’t the time to think about next year and beyond. Remember, "it’s hard to drain the swamp when you’re up to your behind in alligators". In other words, it’s easy to lose track of long term goals when you get sidetracked by more immediate demands. Putting out fires is what HOAs do, right? The poorly run ones seem to do just that.

HOAs are no different than any other business. Those that are successful engage in long range planning. Those that fail to plan fend off disaster after disaster and board members come and go through a revolving door. No real magic here. To know where you are going, you have to have a destination in mind. In spite of bumper sticker wisdom, those that wander really are lost.

So back to the HOA scenario. When a homeowner association doesn’t have the funds to handle a major repairs, they defer those repairs until the funds are available. Of course, money doesn’t grow on trees and without a plan to collect more money, band-aiding and deferring become the default reality and slippery slope.

How do you steer your HOA back up to high and stable ground? The first step is to review your reserve study. "What’s a reserve study?" you say. A reserve study identifies all common element components that have useful lives between 2 and 30 years like the roof, fences, decks, paint, paving, etc. The average condominium has 15-30 components. The average high rise condo can easily have 100. And HOAs that own golf courses and marinas can have many more. Regardless, a reserve study is customized to the HOA in question.

[SIDEBAR: "But our condominium is small", you say (meaning, "why is a reserve study even necessary in our case?") It’s basic math: The more people you have to share the cost, the less the cost per person. Smaller HOAs have a greater need for reserve planning because the cost per person is greater.]

After the component list is determined, a current repair or replacement cost must be determined for each as well as the remaining useful life. With this information and the current inflation factor, a funding plan can be made to instruct the board how much money to collect and set aside each year to meet future financial needs.

While there is no state or federal requirement, the reserve study should be performed by a professional since evaluating condition of components and establishing useful lives and current pricing takes special training that few boards have. The professionals carrying the highest credential in the industry, the PRA (Professional Reserve Analyst), belong to the Association of Professional Reserve Analysts. A list of members and contact information can be found at www.apra-usa.com

2. Reserve Study Update With Site Inspection. Takes a prior year’s reserve study and reviews component condition and updates the Reserve Fund Starting Balance, rate of return on invested funds, current inflation rate and known cost changes for certain repairs.

3. Reserve Study Update With No Site Inspection. The components are not physically inspected and only financial aspects of the study are updated like the Reserve Fund Starting Balance, rate of return on invested funds, current inflation rate and known cost changes for certain repairs.

1. Full Funding is designed to attain and maintain the reserves at or near 100 percent every year. If, for example, a roof has a 20 year life and costs $20,000, $1000 should be reserved each year to maintain 100% funding. If the same approach is used on all components, reserves are maintained at 100% each and every year. When this model is used, all members along the 30 year time line pay a fair share of reserve expenses directly related to their time in ownership.

2. Baseline Funding keeps the reserve cash balance above zero at all times. This means that each component is not fully funded and the reserve balance can drop to zero during the projected period. This model is very likely to result in special assessments.

3. Threshold Funding is similar to Baseline Funding but sets a minimum reserve cash balance as the threshold of, say, $50,000, instead of zero. While $50,000 is better than zero, it may also put the HOA is jeopardy of a special assessment.

Baseline and Threshold models usually contribute less to reserves than the Full Funding model which ultimately will result in special assessments to fill the shortfall. Planning to fund reserves by special assessments is not recommended because they are unfair to those must pay them and sometimes uncollectible due to individual financial circumstances.