Professional Reserves Study Urges Increases
As reported earlier (see “Reserves Study” To Assess Adequacy of Our Reserves) we engaged SCT Reserves to assess our Reserves. SCT Reserves is a professional services firm that provides Reserves Studies to California condominiums, and they conducted studies of Las Mañanitas in 2013 and 2017.
Their preliminary report for this year arrived in mid-July, and the joint Vigilance Committees & HOA Board meeting on July 28th looked at it. SCT is recommending that we SIGNIFICANTLY increase the contributions to Reserves. We have some quibbles with their initial draft, but, even with our revised numbers Las Mañanitas is still only 28% "fully funded" for future Reserves. (See this blog post for an explanation of how Reserves work at Las Mañanitas.) Here it is graphically:
The Red line is our ACTUAL contributions thru 2023. For 2024-2030, the Green line shows an assumption that we’d use a 25% growth factor for 2024, and 15%/year thereafter. Those numbers for future years are subject to decisions by future Boards and Assemblies.
The Yellow line is what SCT Reserves (our professional Reserves Study provider) recommended we should be contributing to Reserves each year, according to their 2017 report.
The Blue line is what SCT is recommending now. (Here is the first draft of their 2023 report).
The Green line is one possible way we could address the shortfall. Another is to apply a "special assessment" to get caught up quickly and then reduce the amount of the annual increases.
As you can see, in 2020 our HOA diverged from the 2017 SCT recommendations, and, given larger unanticipated repairs occurring in 2021 and 2022 after Covid, you can see the results in end-of-year balances of our Reserves funds:
It’s basic math. If you are under-reserving and making large repairs, your savings will dwindle or you’ll defer maintenance and cause problems later.
Here's another way to look at Reserves: According to SCT, we should have $3.1 million in Reserves. The Board believes that building reserves to have $2.0 million on hand would probably be an adequate number … giving us a little buffer for post-Hurricane spending while we await insurance settlements.
Some History: The Assembly approved using just over $1 million USD in during the 2017-2021 period to purchase properties from the Developer, namely, the pool bars, restroom areas, gym, tennis court, front office, office building and unsold garages. Had we not done that, reserve levels would likely now be about $2 million. Also during the first ten years (2001-2011), when the Developer served as Administrator, it failed to save much in the way of Reserves. In 2011 it turned over the property to the HOA with very little money in the Reserve accounts, along with significant "deferred maintenance" needs. Starting in 2012 the HOA performed many repairs while also building Reserves. Sadly, those repairs were then destroyed by Hurricane Odile! [Note: Hurricanes or earthquakes might significantly deplete reserves overnight!]
Anyway, after finishing the projects scheduled for this year, our Reserve balance will be about $800k. Because the buildings are passing their 20th anniversary, some important maintenance is coming due, too. Increasing the rate of contributions to Reserves is necessary.
Last, I make note that our HOA Dues are falling significantly behind inflation.
The Red bars are our actual HOA fees (and assuming an increase in 2024). The Grey bars are what they would have been if we simply kept pace with inflation since 2013.