Community Association Services for FirstService Residential Presented by Criterium Engineers October 2014

Today’s Objective To leave you with some new ideas and useful information

Who Is Criterium Engineers? Our website:

Who Is Criterium Engineers? Celebrating 55 years assisting our clients to continually ‘raise the bar’ for Quality and Professionalism on projects nationwide. We have evaluated more than 600,000 buildings of nearly every type, form and function Consisting of both existing and new structures Including thousands of reserve studies

Who Is Criterium Engineers? A 55 year old International Organization 45 Office located within 31 states 1 office in Canada Office in Las Vegas Criterium Engineers processes the hands-on knowledge, skills and experience to add value to YOUR project right from the start…

Who Is Criterium Engineers? CAI Member for more than 20 years  Presidents Club Reserve Specialists licensed in Nevada  Completed thousands of reserve studies Experience with FirstService Residential

Handout PowerPoint Brochure Newsletter Workshops available

Potential Workshop Topics (see handout) Reserve Studies: Possible Pitfalls Repair, Replace or Renovate? Timing and Logistics of Reserves Putting the Pieces Together: Realtor Relationships and Their Roles in Community Associations Reserve Fun, Funds, Funding and Funding in a Crisis

What is the Significance of the Following? The Number of Homeowner Associations in the Country 300,000+

What is the Significance of the Following? The Number of Homes Being Built into Associations 80%

What is the Significance of the Following? The Number of People living in Associations in the U.S. 60+ Million

What is the Significance of the Following? The Number of People Serving as Association Officers in the U.S Million

What is the Significance of the Following? The Operating Revenue for U.S. Associations $40+ Billion

What is an Association? A Group of Friends A Neighborhood A Small Business A Small Government All of the Above

The “Carefree Living” Perception

The “They Will Take Care of It” Perception

What is an Association? An attractive target Class action law suits A targeted activity for some law firms

What are the Benefits? A Sense of Community Shared Maintenance Restrictions/Control

What are the Risks/Disadvantages? Shared Maintenance Politics Restrictions/Control

What are the Benefits? Image Security “They” take care of everything

What are the Risks/Disadvantages? Compliance Disputes “They” is ME!

What does Nevada law say? Chapter Common-Interest Ownership (Uniform Act) – Article 1: General Provisions Part I: Definitions and Other General Provisions Over 160 pages in this chapter! Almost 65,000 words!

What does Nevada law say? NRS Study of reserves; duties of executive board regarding study; qualifications of person who conducts study; contents of study; submission of summary of study to Division; use of money credited against residential construction tax for upkeep of park facilities and related improvements identified in study.

What does Nevada law say? 1. The executive board shall: (a) At least once every 5 years, cause to be conducted a study of the reserves required to repair, replace and restore the major components of the common elements and any other portion of the common-interest community that the association is obligated to maintain, repair, replace or restore; (b) At least annually, review the results of that study to determine whether those reserves are sufficient

What does Nevada law say? 3. The study of the reserves must include, without limitation: (a) A summary of an inspection of the major components of the common elements and any other portion of the common- interest community that the association is obligated to maintain, repair, replace or restore; (b) An identification of the major components of the common elements and any other portion of the common-interest community that the association is obligated to maintain, repair, replace or restore which have a remaining useful life of less than 30 years

Topics for today Reserve fund studies – CAI standards – Enhanced studies Reserve funding – Cash flow – Component method

CAI Reserve Fund Standards 1.Full (in kind replacements) 2.Update With Site Visit 3.Update No Site Visit

Definitions Cash Flow Method – A method of developing a reserve funding plan in which contributions to the reserve fund offset the variable annual expenditures from it. Different reserve funding plans are tested against the anticipated schedule of reserve expenses until the desired funding goal is achieved. The Cash Flow method permits all of the reserve funds to be pooled such that the total available reserve balance can be used to meet the projected expenditures of any reserve component.

Definitions Component Method – A method of developing a reserve funding plan in which the total contribution is based on the sum of contributions for individual components. The Component Method, often called the Straight-Line method, provides for the independent funding of each common element. That is, the reserves for each component, or type of component, are calculated separately and funded independently of other components. With this method there is no pooling of reserve funds and each component has to maintain its own reserve balance.

Definitions Fully Funded Balance (Total Accrued Depreciation) - An indicator against which Actual (or projected) Reserve balance can be compared. The Reserve balance that is in direct proportion to the fraction of life “used up” of the current Repair or Replacement cost. This number is calculated for each component, and then summed together for an association total. The method of calculating the Fully Funded Balance is identical to that employed in the Component Method.

Definitions Funding Goals - Independent of methodology utilized, the following represent the basic categories of funding plan goals: – Baseline Funding – Component Full Funding – Proportional Funding – Statutory Funding – Threshold Funding

Reserve Component “Four-part test” Common area responsibility Limited useful life Predictable remaining life Above a minimum cost

Reserve Component List DescriptionULRULCost Pool furniture – replace50$4,600 Pool – resurface105$10,000 Roof – replace2018$80,000 Asphalt – seal52$5,000 Asphalt – resurface205$25,000 Building – repaint101$50,000 Elevator – modernize205$80,000 Hallways – refurbish86$24,000

Fully Funded Balance Fractional age X Current cost (Summed for all components)

DescriptionULRULCostFFB Pool furniture – replace50$4,600 Pool – resurface105$10,000$5,000 Roof – replace2018$80,000$8,000 Asphalt – seal52$5,000$3,000 Asphalt – resurface205$25,000$18,750 Building – repaint101$50,000$45,000 Elevator – modernize205$80,000$60,000 Hallways – refurbish86$24,000$6,000 TOTAL:$150,350 Fully Funded Balance

Percent Funded Actual $ Reserves Fully Funded Balance X 100

Reserve Funding Principles Sufficient cash Stable contribution rate Evenly distributed Fiscally responsible

Reserve Funding at Association- governed Communities Well funded – 30% Under funded – 40% Severely under funded – 30% 70%

Cash Flow Funding Item >>>>>>> 18 Pool furniture 4,600 Pool resurface 10,000 Roof replace 80,000 Asphalt – seal 5,000 Asphalt – resurface 25,000 Building – repaint 50,000 Elevator – modernize 80,000 Hallways – refurbish 24,000 Annual Totals 4,600 50,000 30, ,000 24, ,000 Opening Balance 75,000 Annual Contribution 15, ,000 15,000 Cumulative Balance 75,000 85,400 50,400 35,400 50,400 65,400 (9,600) (18,600) 146,400 81,400

It’s just good management Reserve expenses are not discretionary Somebody pays them all! “Board members in underfunded associations are sitting ducks for lawsuits.” - Anonymous Attorney

Prudent Board Actions Review your responsibilities Make “right” (not necessarily popular) decisions Become well versed in the Business Judgment Rule (BJR)

Business Judgment Rule Limits the Board’s decision-making liability when acting… – within their power – after reasonable inquiry – in best interests of Association

Four consequences of under-reserving 1.Deferred maintenance 2.Need for special assessments or loans 3.Lower property values 4.Liability exposure

Tips for Reserve Funding Include all components Include demo and disposal costs

Preventative Maintenance Pays Preventative maintenance should compliment reserve study Use maintenance contracts wherever possible Establish accountability for maintenance

Technical Topics Paving – To seal or repave?

Technical Topics Roofs – What can’t you see?

Technical Topics Stucco – Vulnerable to moisture

Technical Topics HVAC – Check condensate drainage

Technical Topics Security …a growing concern

Technical Topics Walls – Who is responsible?

Thanks!