The asterisk in the last blog post, The more complicated HOA budget, was reference to items that have an estimated useful life. Estimated useful life is a generally accepted life span for things such as paving, roofs, pool marcite or fences. Nearly anything that doesn’t require replacement every year has an estimated useful life.
If you live in a town home or patio home that has other units attached under one common roof, the association (provided it is stated in the documents) should set aside a portion of fees each year to allow for the replacement of the roof. A roof has an estimated useful life of approximately 15 years. There are other precipitating factors such as wind damage, tree damage or other damage, but for purposes of simplicity, lets just say a useful life of 15 years. If the cost of replacing that one roof is estimated at $10,000, the Board of Directors should set aside funds each year to pay for it at the end of 15 years. So let’s do the math, $10000 ÷ 15 years = $666.66 that should be set aside each year for that roof. But wait there’s more! Your community has 20 buildings, all with the same roof line and all with the same footprint. More math, 20 buildings x $666.66 per year = $13333.00 per year or $1111.12 per month. Here’s the touchy part of all of this. Unless it is specifically stated in the governing documents, there is no requirement that funds be set aside for roof replacements. Older communities sometimes do not state, in no uncertain terms, that the association must provide for roof replacement. The fiscally responsible thing to do though is to provide for these replacements. The downside to not setting aside these funds is the possibility of a special assessment. For the above example, to replace the roofs on all of these buildings at the same time would cost each owner an extra $2000-all at once (20 buildings, 5 units in each building for a total of 100 owners). When spread out over 15 years, the cost to each owner is only $133.33 per year.
Back to the asterisk. For amenity buildings, set aside money for the replacement of those roofs as well. The size of the building roofs makes it a reasonable amount to budget for each month.
Gated communities will usually require the upkeep and maintenance of not only the gates and gate operators, but also the streets in the community, depending upon how your association was initially set up by the developer. If your community is responsible for the upkeep of the roads, apply the same methods of estimated useful life to your paving obligations. Ideally, contact a reputable paving contractor to help you determine the actual linear footage needed (or square footage, your contractor can help you). There are other avenues to explore to help preserve the existing asphalt. Sealing every two years is a less expensive method and will help to extend the life of your roads. We’ll note here that asphalt is heavily dependent on petroleum products. The volatility of petroleum commodities can cause a significant price difference between your initial price you base your funding on and the real price at the end. If there is an experienced corporate accountant in your community, seek out his/her advice and adjust the funding each year to accommodate significant changes in the petroleum market.
Gates are a source of significant maintenance expense each year and it will be up to the Board of Directors to determine their “threshold of pain” as it relates to repairs vs. replacement. A gate system will last ten years or so depending on its duty cycle-a small community will have less vehicles entering so the opening and closing will be less. Larger communities with more drivers will create more wear and tear on a gate. Proper upkeep and maintenance also helps to extend the life of a gate system. Also, consider opening entry gates between 5 pm and 7 pm for evening traffic and exit gates between 7 am and 9 am to reduce the cycles. As with all major capital expenditures, use the estimated useful life to allow for replacement when the time comes.
These are just three of the possible capital improvements that should be budgeted for across several years. Any other items of significant financial impact in your community should also be budgeted for accordingly.
Where to put the money
Reserve funds should be set aside in an account separate from the association’s operating funds. A line item should be on your budget and financial statements showing how much is to be applied to that account and how much is actually being set aside (on the financial). Two separate accounts for operating and reserves funds should never be comingled-meaning don’t use your reserve funds to supplement the operating funds. Just because the association is short one month in the operating account, funds should NOT be removed from the reserve account to fund the shortfall.
As always when we finish with a difficult topic, check your association Declaration of Covenants, Conditions and Restrictions to determine what exactly is required for your particular association.