By: Damian J Esparaza, CEP Smart Property
It’s important that HOAs and condo associations maintain a healthy cash flow. That’s why delinquencies are such a heavy financial burden. But while your community has a budget you adhere to closely on the operating side, the capital expenditures side is rarely looked at as closely. In order to maintain a healthy cash flow, you need to make sure that your maintenance and replacement schedule stays on budget too. That’s where capital reserve planning comes in.
Static Reserve Study Shortcomings
You’ve heard it before, and you’ll hear it as long as you’re on the board: your community needs a reserve study to be successful. That’s only half true. The industry’s worst-kept secret is that a reserve study simply isn’t enough. Your reserve study is much like driving a brand-new car off the dealership lot–it begins to lose value immediately, and that loss increases over time.
A static reserve study is not the final step in the journey to community financial success the way it’s made out to be. Instead, it should be used as a guide for your condo’s tools and strategic planning to make it viable long-term.
Too many community associations are behind in their reserve fund contributions: 1 in 5 are expected to go cash-flow negative within the next five years! That’s because a static reserve study isn’t designed to update or adjust as time goes on. That means communities relying on a years-old static reserve study aren’t adapting their spending and saving habits to reflect the needs of the economy they’re in–they’re staying the course to support goals they were given in a completely different set of economic circumstances.
This leads to underfunded reserve accounts that aren’t prepared to handle emergency repairs and replacements, forcing boards between a rock and a hard place: issue a hefty special assessment or defer the maintenance and hope to afford it in the future before it causes harm to community members.
The Devastation of Deferred Maintenance
When your financial investments are missing the mark, your community is being put further and further at risk. If you’ve been reading Axela’s blog, you know that special assessments are a dangerous way to financially support your community. Deferring your maintenance is just as dangerous and can lead to catastrophic or even deadly destruction.
The longer necessary repairs and maintenance to a community are ignored, the more dangerous those components become. In a multi-family condo building specifically, that risk encompasses more than just losing utilities or luxuries. In 2021, the world saw the worst-case scenario of maintenance deferment when Champlain Towers South collapsed in Surfside, FL. After years of the board struggling to fund the needs of the community while also keeping assessments low, the impact of aging infrastructure and deferred maintenance finally took its toll.
But it’s not just major repairs that can have a devastating effect on communities. In 2018, a Las Vegas HOA lost a $20million lawsuit over a swing set that they had deferred maintenance on for years. When a 15-year old sat on the swing to send a text message, the metal bar broke, landing on his head and causing permanent injury. As a result of the lawsuit’s verdict, each unit owner was responsible for $80,000 in a special assessment.
It is imperative that all communities avoid the disasters that can result from aging infrastructure and deferred maintenance. The best thing any community can do is develop a long-term solution by transforming their static reserve study into a living strategic plan.
Reinventing The Reserve Study
SmartProperty is working to change the way we think about capital planning and the asset management lifecycle with The Living Reserve Study®. The Living Reserve Study combines inventory management, capital planning and analysis and project management tools to help communities track the full lifecycle of common area components.
The Living Reserve Study is always up to date–even if you don’t have time to maintain your data. SmartProperty can conduct an annual update of your reserve data – updating maintenance performed, adjusting replacement costs and timelines based on shifting market values, and altering funding models to help your board set assessments. This means communities can avoid hidden surprises that stem from outdated information, and ensure that the community’s cash flow stays in the black not only for this budget year, but for years into the future.
With always up-to-date information, Condo and HOA boards can make data-backed decisions with confidence. The Living Reserve Study helps reduce liability exposure and maintain legal compliance. It also makes it easier to get buy-in from homeowners when they can see in clear, easy to understand reports, the true financial position of the community.
A positive cash flow is critical for every community. But your cash flow needs to take into account all of your community, not just receivables. If you want to maintain a healthy cash flow, and a healthy community, you need The Living Reserve Study. Visit smartproperty.com to get started today!
