2006 Issue 6

RESERVE ANALYSIS AND PLANNING - A WISE INVESTMENT
By Walt Williamsen, PCAM

It always amazes me to discover that a common interest community such as a condominium or planned unit development that may be worth tens of millions dollars when all of the units and amenities are combined choose not to invest several thousands of dollars to protect the value of the property and the interests of the membership.
 
Consider:  (1) A condominium comprised of 50 units valued at an average market value of $200,000 would be worth $10,000,000 on paper; and (2) A professionally prepared reserve analysis may cost between $2,500 to $5,000 or more, depending on the property.  (The cost of insuring the property against physical loss and liabilities is likely to be four or five times that amount each year.)

For this condominium an investment of $5,000 in preserving the property against financial failure is only .05% (.0005) of its’ total value!

The initial investment in a reserve analysis is made even more valuable by the fact that once the fixed or constants for the major common element systems have been documented, the cost of updates every three years should be very reasonable.

An example of “constants” would be the total square feet of roofing or asphalt pavement that would need to be replaced every 20 or 30 years.  Unless the complex is expanded or otherwise altered these quantities should not change over time.  What does change is actual useful life or condition and estimated replacement cost.  They are the key variables that would be reviewed and updated in an updated capital reserve analysis.

When queried about future estimates for paving, contractors just roll their eyes on account of the recent spikes in oil prices.  The same can be said for roofing.  Recent hurricanes and oil prices have made many reserve projections seriously understated.

Large unexpected shortfalls requiring loans or assessments are often the result of incompetent or ineffective governance and management.

Talk to any banker who is in the business of making loans for capital repairs and replacements and he or she will respond that it is a nationwide situation where many associations now have to take on loans of six or more figures to take care of deferred repairs or normal replacements due to insufficient reserves.

Loans may be appropriate in some situations.  However, a downside is the fear that many unit owners who are on fixed incomes cannot afford their share of the debt service – this on top of soaring energy costs!  The result could be an unplanned relocation to “more affordable” housing.  (One of the original condominium developments in the state of Connecticut has been in the news of late because of drastic increases in proposed budgets to pay for planned capital projects and the concern for residents on fixed incomes.)

These are some of the questions that concerned unit owners and competent managers should be asking or suggesting:

• Has the association had a third party review of the capital reserves within the past several years, or in some cases, ever? – If not, why not?
• Does the association have a written reserve policy that the membership is aware of and is it reported on at general meetings? – If not, why not?
• Does that association have a written plan that includes the elements of a standard reserve analysis in addition to extraordinary projects that may be proposed?

A concept stressed to financial planners and controllers in business is to “avoid unpleasant surprises.”  In many respects common interest communities are business entities and the same creed should also apply to them.

A third party review of an association’s financial picture and reserves for the future is one cost-effective way of preserving and enhancing the value of a property and avoiding “unpleasant surprises.”

Walt Williamsen has vast experience as a property manager.  He has been active with CAI-CT for many years, serving as President from 2001-2003.   He is currently a member of the CAI-CT Board of Directors and serves as Secretary.  Walt is a frequent speaker at CAI-CT seminars and he coordinates our popular Ask the Experts: A Basic Course for Board Members program.  Walt is the owner of Condominium Consulting Services, LLC.