1. Reserve Study Presentation: Common HOA Budgeting Mistakes Joel L. Tax, RS PRA
2. 1. Inaccurate component list 2. Looking to the past to predict future projects 3. Ignoring inflation – assuming interest has a greater positive impact 4. Not regularly increasing the reserve allocation amount 5. Doing Nothing! Common Budgeting Mistakes
3. By far the #1 reason we see Clients struggling with reserve budgeting is that they have an incomplete component list. 1. Inaccurate Component List
4. If the component list and their associated costs are not known then adequate budgeting is not possible. 1. Inaccurate Component List
5. 2. Looking to the past to predict future projects - Buildings do not age gracefully!
6. 2. Looking to the past to predict future projects - What is seems to be random to a Client is often just another day at the office for a knowledgeable professional.
7. 3. Ignoring Inflation • Inflation impacts total cost of replacement for all components. • Interest earned only impacts the actual reserve account balance. • 3% compound inflation equals a doubling of costs every 23.5 years! Impact of Inflation
8. 3. Ignoring Inflation - Interest vs. Inflation Reserve Account Balance: $100,000 Replacement Costs : $1,000,000 1% Interest Earned / yr. 3% Inflation / yr. = $1,000 Earned - Positive Impact = $30,000 Additional Funding Needs – Negative Impact
9. 3. Ignoring Inflation - Offsetting I D E A • Offset the impacts of inflation with regular annual increases to the reserve account allocation rate. • This typically requires a regular increase to the allocation rate. Annual increases are most fair to the current and future members of the community.
10. Annual increases are most fair to the current and future members 4. Not regularly increasing the reserve allocation rate
11. Every year the allocation rate does not increase to offset inflation budgeting will get more difficult. 4. Not regularly increasing the reserve allocation rate *Assumes $1,000,000 in component costs*
12. Ignoring an underfunded reserve account has no impact on the outcome as the project costs will still occur! 5. Doing Nothing!
13. Avoid These Common Mistakes to Prevent Missing the Target 1. Creating an Inaccurate Component List – Hire qualified professionals. 2. Looking to the past budget to predict future projections – Buildings do not age gracefully – more of the building will need to be replaced with age. 3. Ignoring inflation / assuming interest has a greater impact - inflation impacts the total cost of all components – interest is only earned on the amount actually in the account. 4. Not regularly increasing the reserve allocation rate – the budget needs to offset the significant impact of inflation and regularly – annual increases are most fair. 5. Doing Nothing! Deterioration to common areas works against a reserve budget 24/7 – 365 days a year.
14. Do you have any questions? ???Joel L. Tax, RS PRA - Reserve Specialist - Professional reserve Analyst