Reserve Study Deficit Revealed, Loan Options Considered
During the recent Finance Committee meeting on June 14, OVA President Steve Spanier sat in for Finance Committee Board Liaison Tom Kendrick.
The Agenda included the Treasurer’s Report, Capital Fund expenditures of the East Rec Center and the recently completed physical inspection for the 2019 Reserve Study Report.
Several members of the community were in attendance and joined in the conversation regarding the 2019 Reserve Study. Answering a question as to whether the Reserve Study will include realistic costs for the Berger Remodel in 2020, OVA Manager Kevin Hubred stated that if accurate costs for the Berger remodel were included we would have a negative funding percentage and this would look very bad for prospective buyers of Oakmont homes.
OVA Treasurer Elke Strunka countered Hubred’s statement, saying that including this accurate accounting will make it clear that a loan would be necessary and that a line should be included showing loan proceeds as the funding source. Hubred held to his view of not including the costs for Berger since they were estimates and not hard costs. It was then pointed out that best estimates are what we have and they must be included in the Reserve Study accounting.
Nordby Construction provided OVA an official estimate of $4 million in costs for the Berger remodel. To retain the current Reserve Study cost of $250,000 would result in a false funding percentage. An audience member pointed out that savvy buyers and current homeowners want to see a true reflection of OVA’s financial health and to provide a materially inaccurate report is a misrepresentation of the Association’s financial health.
Strunka went on to note that a considerable number of items scheduled to be repaired or replaced in 2018 have not been completed. Hubred and Facilities Manager Rick Aubert were to meet the following day, June 15, to be updated on the Reserve Study report.
It was also reported that OVA’s new Reserve Analyst Robert Browning has completed the required 3-year visual inspection of OVA assets and is processing this information. Hubred said that the final version will be available for interested OVA members to view in July.
The next Finance Committee meeting is scheduled for July 12. Ms. Strunka said she is conducting an analysis and will report the details of a possible loan to cover maintenance and remodel expenditures, with the understanding that interest rates are likely to be lower in 2018 than in the future.
During the May 1 OVA board meeting Strunka mentioned that the issue of such a loan had come up at the Finance Committee meeting in April. She added, “If the board would like me to consider some different financing scenarios I would look into it and prepare an analysis for the next (i.e. June 19) board meeting.” Strunka said she was waiting for the completion of the Reserve Study visual inspection for more accurate numbers.
Thank you for taking this on, Lynda. Help me understand what I clearly don’t.
When I look at the RS component schedule, I see 10 exterior items and 19 interior items due for replacement in the remodel scheduled for 2020. The remodel will also include entirely new items that will presumably be paid from our Capital Improvement Fund. The current cost estimate for all items is $1.345mm. Our anticipated AR balance on 12-31-18 to cover this expense (using 22.33% as the multiplier) is $300k. Where does the $250k number for remodeling the Berger Center come from?
Either way, our reserves look inadequate to this non-accountant. However, none of this estimates how much of remodel expenses will be paid out of our CIF. Virtually every component scheduled for replacement involves a substantial upgrade in the quality of the item being replaced, in addition to the new items. We’d have a better understanding of our shortfall if some idea of the cost sharing between the two funds was known. Thanks again.
Only slightly off topic, I was in the room when our association manager made the comment that truer RS cost estimates might deter prospective buyers, or words to that effect. I was appalled. Steve Spanier, in attendance, should also have been appalled.
Yes, Lyn, in response to your mention of our association manager’s inclination to misrepresent our reserve funding status as conveyed in that meeting, it was apparent he is not familiar with the duty to disclose the most accurate financial information available. OVA risks legal liability for knowingly misrepresenting its financial position.
Lyn, here are my explanations:
Asset Replacement Fund (ARF) pays for:
Large repair & replacement expenses, for example:
• Roof replacement/repairs
• Pool replastering
• Pool decking replacement
• Wood deck replacement
• Landscape replacement
Capital Improvement Fund (CIF) pays for:
New facilities/amenities and substantial improvements to existing facilities
The Berger Upgrade line item in our 2018 Reserve Study was estimated at $250,000, which, as we know, is inaccurate. With more accurate cost estimates in our Reserve Study and appropriate funding at 50%, there would likely be no need for loans or special assessments. Then we can consider using CIF money for new projects. We always, though, have the option to redirect CIF funds into the ARF.
I totally agree. As the former owner of a large Association Management company in Santa Rosa. I have been perplexed by our previous Board’s lack of understanding about Reserve Savings requirements. I’m so pleased to finally see some rational evaluation of our reserve requirements finally happening. We MUST officially publish the true status of our reserve program. And then we must take the actions necessary to fund our reserves. If it takes a loan or significantly increased association dues, so be it. Our OVA dues are, and have been, too low for many years
Bob