By Bryan Farley, RS; President; Association Reserves
Within a month, the country has seemingly gone from “business as usual” to “no business at all” for many sectors. This is a time when decisions will matter for your community. The way a community’s board members act now will set the tone for the future.
With so much uncertainty, the board will need to make wise financial decisions to take care of its owners and its property. On one hand, board members must be sensitive to those who have had the rug pulled out from under them, but also, board members must fulfill their fiduciary responsibility as representatives of the community.
How can a board make a fair and balanced financial decision?
In regards to a property’s Reserve account and budget choices, we have a few ideas that may help the board’s Reserve decisions during this time.
1) Prioritize your Reserve expenses in 2020:
Consider a potential scenario: the board has been planning to remodel and upgrade the entry lobby. In addition, the board was anticipating the need to replace the roof of the building in late summer 2020, based upon recommendations from their Reserve Study provider and roofing specialist.
It is important to note that we may be entering a time where delinquencies become more common, therefore, the board should not plan to defer projects that could cause unwanted maintenance issues or carry an extra expense. In this case, a deferred roof replacement may cause a higher replacement cost due to potential roof failure if left deferred. A failed roof allows potential water intrusion into the substructure, which may then require costly and invasive mitigation. On the other hand, a deferred lobby remodel carries no structural risk, only potential aesthetic issues.
The board members should review their 2020 Reserve Study budget and prioritize which assets may be safely deferred. We would advise that safety or protection components should not be deferred. Safety and protection components include elevators, fire safety systems, domestic heating and water systems, and structural envelope systems, to name a few.
2) Recalculating the 30-year Reserve Plan:
If your board has access to client-facing Reserve Funding software, then now is an excellent time to run ‘what-if’ scenarios on the contribution rates, so that the board can test whether or not they may defer Reserve contributions for a few months without causing long term budgetary problems.
If the board does not have access to any updateable Reserve software, then ask your Reserve Study provider for the more affordable, No-Site-Visit update service. A ‘No-Site-Visit’ update typically costs anywhere from 50%-80% of a ‘Full’ Reserve Study. This will allow the board to not only update their old Reserve Study with fresh information, but will also allow them to talk to their provider about running some alternate funding scenarios. This will give the board a few options on potential contribution amounts, and what the consequences will look like if they proceed with a given plan of action.
3) Take advantage of temporarily depressed pricing:
Certain industry sectors are offering huge savings at this time, particularly the retail sector. At the time of writing, there are over 70% sales on pool furniture, indoor furniture, security systems, and other consumer goods. If the board has the cash available, with no other pressing projects to complete, this may be a good time to take advantage of temporary sales.
The board should use the Reserve Study as a tool to shop around for the needs of the property. Are there any upcoming projects identified on the Reserve Study? Potentially there is a need in 2021 for pool furniture? If so, could the board move that project up a year? Take a look at the Reserve Study to see if there are any upcoming projects and potentially, find a few deals.
In summary, there are uncertainties ahead, however, the board has the opportunity to not only help the owners at their community, but also improve their community.