Reserve Fund Study prepared for The Greens at Pelican Point Homeowners Association February 2013 prepared by

Transcription

1 Reserve Fund Study prepared for The Greens at Pelican Point Homeowners Association February 2013 prepared by Craig Naden and John Carlson

2 Table of Contents TABLE OF CONTENTS Page No. 1.0 EXECUTIVE SUMMARY INTRODUCTION Overview Description of The Greens Purpose/Scope of the Study Standards of Reference APPROACH Basic Guidelines Methodolgy Sources of Information SITE ASSETS Storm Drainage Lakes Streets Parking Areas Sidewalks Landscaping Activity Center Community Center ECONOMIC ANALYSIS Inventory Funding Plans Reserve Requirements Reserve Analysis Reserve Fund Status Cash Flow Investment Policy Energy Efficiency CONCLUSIONS AND RECOMMENDATIONS Conclusions Recommendations Disclaimer Resumes APPENDIX A - PHOTOGRAPHS APPENDIX B MEMORANDUM OF UNDERSTANDING WITH TOWNHOMES APPENDIX C DETAILED CASH FLOW TABLE * * * * * TOC-1

3 Table of Contents LIST OF TABLES Table No. Page No. 5-1 Complete Inventory Replacement Reserve Inventory Reserve Fund Analysis Reserve Fund Cash Flow * * * * * TOC-2

4 Table of Contents LIST OF FIGURES Figure No. Page No. 5.1 Reserve Fund Cash Flow (full funding) Reserve Fund Cash Flow (base-line funding) Reserve Fund Catch-up to Full Funding Level * * * * * TOC-3

5 Executive Summary 1.0 EXECUTIVE SUMMARY This reserve study was prepared to evaluate the funding level required to replace the capital assets of The Greens Homeowners Association (The Greens HOA) as they reach the end of their useful life. An inventory was prepared and each asset was evaluated for condition, remaining usable life and cost of replacement. During the preparation of the study, the Board of Directors of The Greens HOA (Board) made a decision to consider any item costing under $5,000 to be regular maintenance and not normally worthy of funding from the reserve account. The study uses a 30-year period for the evaluation to provide a cycle long enough to cover replace of some assets. Assets with expected life exceeding 50 years are not typically included in the funding for reserve accounts until their end of life appears to be less than 40 years because the estimate of reserve cost and the timeframe for replacement is hard to define. A summary of the findings and recommendations are: The Greens HOA s assets are generally in good condition and will require continued maintenance and attention to remain that way. Some assets appear to be aging faster than would be expected and must be monitored to determine if adjustments are necessary to the expected life of the asset. The Board is funding the reserve fund with a $20 per month contribution from each homeowner plus a portion of the surplus of the annual operating budget, if any is available. There is no set requirement for the reserve funding level in any document such as a deed restriction or by-laws. This is a prudent practice adopted by the Board and continued at its discretion. The major impact on the reserve account has and continues to be street repairs. Major street repairs were made over the past three years and more are planned over the next five years. As of 12/31/2012, the reserve fund is approximately 43% of a full funding goal. This goal attempts to have an amount in the reserve fund that is equal to the depreciation value of the assets. Planned repairs to streets will continue to deplete the fund for the next five years. The annual contribution is 20% higher than the amount calculated as the annual contribution amount, but at this level it will take approximately 20 years to get the fund back up to the full funding goal. A portion of any surplus in the operating budget should continue to be transferred to the reserve fund to keep the reserve fund as healthy as possible until the full funding goal is achieved. Update this study at least every three years or as changing conditions dictate. * * * * * 1-1

6 Introduction 2.1 OVERVIEW 2.0 INTRODUCTION The Board of Directors of The Greens at Pelican Point Homeowners Association (The Greens HOA) is responsible for maintaining the value and condition of the assets that are either owned or under the responsibility of The Greens HOA. In summary, these are the common areas including the Activity Center and Community Center. Dues collected from the homeowners cover the costs of these financial obligations. The obligations themselves fall into two major classifications: operations and maintenance and capital improvements. Operations and maintenance are the normal expense items such as lawn care, utility bills for the buildings, and routine small repairs to the facilities and grounds. Capital items include the larger non-routine items such as roof replacements, exterior painting, and street repairs. A Reserve Study is an important tool used to ensure a community Homeowners Association community has sufficient funds available for the long-term, periodic capital expenditure requirements. The study projects these expenditures over an extended period of time through a structured analysis and develops a model to meet these financial requirements. The recommendations in the report are then passed on to the Board of Directors for consideration and implementation. The Reserve Study is also useful to all residents as a source of information on the value of the community and its financial health. This study is an update of a reserve study conducted by Criterium Engineering in the fall of DESCRIPTION OF THE GREENS The Greens HOA is an active adult community with single-family homes and twelve single-story townhouses. The first phase of home construction occurred in Currently there are approximately 130 households with a number of lots available for sale and development. Future expansion of the community is controlled by the developer. Photographs of The Greens are in Appendix A. The Greens HOA owns the streets, sidewalks, drainage system, parking areas, two gazebos, the Activity Center, park areas, common grounds, three lakes, and fencing. The Greens HOA leases the Community Center and is responsible for the operation, maintenance and capital repairs of that building. The townhomes in The Greens do not have their own independent association. The Greens HOA is responsible for the paintable surfaces of the townhomes while the owners maintain the rest of their dwelling. The details of their relationship with The Greens HOA are covered in a Memorandum of 2-1

7 Introduction Understanding (2009) between the two parties. The Memorandum of Understanding with the Townhomes owners is in Appendix B. The lake behind the homes at the end of Courtyard Drive was conveyed to the Greens HOA per the latest conveyance document, but this document is currently under review. The Greens is served by the following utilities: Potable Water- Ascension Parish Sewer Wastewater Treatment, a community sewer system Electricity- Entergy Louisiana Natural Gas Atmos Energy Phone - AT&T/Cox 2.3 PURPOSE/SCOPE OF THE STUDY The purpose of this Reserve Study is to perform a reserve fund analysis and to develop the capital needs plan. It is intended to be used as a tool for The Greens HOA in determining the allocation requirements needed in the reserve fund in order to meet future anticipated capital expenditures for the community. This Reserve Study forecasts capital repair obligations for the community for thirty years. It should be noted that events may occur that could have an effect on the underlying component or system useful life assumptions used in this Reserve Study. Likewise, inevitable market fluctuations can have an impact on component or system replacement and repair costs. Therefore, as with any planning documents, the earlier years are usually the most reliable. Recommended practices would be to review the study annually and update every three to five years. Typically, an HOA has two broad cash requirements: the general operating and routine maintenance costs and the capital repair and replacement reserves. The Greens HOA recently split its accounting records to track these different types of expenditures. 2.4 STANDARDS OF REFERENCE The following terms are commonly used to describe the conditions of facilities: Excellent: Component or system is in "as new" condition, requiring no rehabilitation and should perform in accordance with expected performance. 2-2

8 Introduction Good: Component or system is sound and performing its function, although it may show signs of normal wear and tear. Some minor rehabilitation work may be required. Fair: Component or system falls into one or more of the following categories: o Evidence of previous repairs not in compliance with commonly accepted practice, o Workmanship not in compliance with commonly accepted standards, o Component or system is obsolete, o Component or system approaching end of expected performance. Repair or replacement is required to prevent further deterioration or to prolong expected life. Poor: Component or system has either failed or cannot be relied upon to continue performing its original function as a result of having exceeded its expected performance, excessive deferred maintenance, or state of disrepair. Present condition could contribute to or cause the deterioration of other adjoining elements or systems. Repair or replacement is required. Adequate: A component or system is of a capacity that is defined as enough for what is required, sufficient, suitable, and/or conforms to standard construction practices. * * * * * 2-3

9 Approach 3.1 BASIC GUIDELINES 3.0 APPROACH Discussions were held with the Board of Directors on the criteria to be factored into the analysis of the reserve level. The use of these criteria follows prudent guidelines for such studies and provides a realistic approach to the determining the funding level of the reserve account. A summary of these criteria are: Support the separation of capital and maintenance work in the operating budget and reserve budgets of The Greens HOA. Routine maintenance of certain components will extend the life of that component beyond its standard accepted life thus increasing the depreciation period and reducing the yearly reserve funding for that component replacement. These items will be identified in the report. Any item costing under $5,000 will be considered in the maintenance budget rather than capital. These are usually short term failures such as a hot water heater, rather than an item that can be scheduled. The study period will be 30 years. The study will include those items with a maximum life expectance of 40 years. This limitation addresses concern for setting aside funds for large capital items when the actual replacement timeframe is questionable, such as the main storm drainage lines in the street. Major damages to the community center or activity center would be covered by insurance. Upgrades and replacements to the buildings will be discussed in the report and assigned to fall under either the maintenance or capital budget as appropriate. The report will track the guidelines for a reserve study. A recommendation will be made to the Finance Committee on funding requirements and needs for funding in the short-term, not how to invest the funds. Funding program recommendations are made with the objective of limiting substantial cash excesses while minimizing financial burdens that can result from significant cash inadequacies. 3.2 METHODOLGY The annual funding requirement of the reserve account should be based on the amount to maintain the value of the assets of the community. The basic steps to determine the funding requirements are: 1. Develop an inventory list of the assets. 2. Assess the expected life and replacement cost of the asset. 3-1

10 Approach 3. Classify the list on the basis of maintenance items versus capital items. 4. Calculate the annual amount required to fund the replacement of the asset. 5. Develop cash flow analysis of reserve requirements 6. Evaluate alternative funding approaches The first step develops an inventory of the assets that includes the description of the asset and the year it was placed in service. The second step determines the replacement cost and expected life of the asset. The expected life can be extended with the assumption that a good periodic maintenance program be put in place to maintain the asset. The Buildings, Grounds, and Maintenance Committee provided input in the development of the inventory list. Their experience with the facilities is extremely helpful in developing a comprehensive list of all assets. At this point, the key is to identify all major work that might be required on the assets and evaluate the maintenance program to see that service and repairs are being performed to maintain the assets. A number of sources were used to develop the cost of repair or replacement of the assets. These sources include obtaining quotes from suppliers or contractors, costs of recent repair, and pricing information available from the internet. The objective was to get a reasonable estimate for the work and replacement of the asset with a comparable piece of equipment. No attempt is made to either upgrade or degrade the quality of the replacement item. For example, a higher efficiency air conditioner may cost more, but that decision can be made at the time of purchase based on the value of the energy savings. The next step was a review of the inventory list to separate out any items that are more properly classified as maintenance. The reserve account should be used to fund capital replacement and major repair work that extends the life of an asset. It is not intended to be used as funding for routine maintenance projects. Those projects should be funded through the annual operations budget. The Board of Directors provided direction that any work costing less than $5,000 should be classified as maintenance. This is consistent with prudent practices for funding reserves. That is not to say that all projects over $5,000 are considered capital projects. While most projects are easy to classify such as replacing a roof, there are projects that may not be as clear to everyone whether they should be maintenance or capital. One such task is painting. Painting an interior room is usually considered to be a maintenance item because it is freshening up the appearance of the room; whereas painting the exterior of a building is a capital item because the paint is a protective coating for the exterior and extends the life of the wood. However, painting the interior of the Activity Center can be considered capital because it is protecting the structure of the buildings because of the pool and chemicals. The cost 3-2

11 Approach of painting the building interior is not a factor in the decision. Similarly, replacing a hot water heater may be seen as a capital item. However, the cost of replacement is relatively low and the timing of the repair is usually such that it cannot be scheduled much in advance. The storm drainage system is one major item that warrants adjustment of the system life. Storm drainage system replacement is very expensive which is why cities delay the work until the last possible moment and then try to get state or federal funding for the work. As a private owner of the streets, that option is not available to The Greens HOA. The good news for The Greens residents is that most drainage system failures are caused by tree root damage when trees are close to the storm drain pipes. Tree roots seeking water grow into the joints in the drainage pipe. The result is leakage through the pipe joints when it rains that in turn causes erosion of the soil around the pipe that then leads to failure of the street slab. The trees in our neighborhood are smaller varieties and the main drainage pipes are located in the center of the street rather than the side of the street closer to the trees. These facts should lead to longer than average life for the storm drainage system. If and when street failures occur in the future, they would probably be addressed on a case-by-case basis rather than the replacement of the entire storm drainage system. 3.3 SOURCES OF INFORMATION The preparation of the study included inspections of the property, coordination with The Greens HOA s Buildings, Grounds and Maintenance Committee and Street Repair Subcommittee, reviews of available drawings and prior reports, and cost estimates from contractors and internet sources. Cost information of prior work was also reviewed. The book Reserve Funds: How & Why Community Associations Invest Assets by Mitchell H. Frumkin and Nico F. March (1999) was used a reference for format and content of the study. This book provides different cash flow and financial approaches that are discussed in later sections of the report. It is available from the Community Association Institute. * * * * * 3-3

12 Site Assets 4.0 SITE ASSETS This section provides a brief description of The Greens HOA assets and obligations for capital repairs. It contains information about the assets, significant deficiencies, and expected replacement time frames based on visual surveys of the buildings and grounds, research of documents, and conversations with people who have knowledge about the community. Opinions about the present condition of The Greens HOA community are based on visual evidence available during an investigation of all reasonably accessible areas falling under the responsibility of The Greens HOA. No surface investigation or destructive testing was performed. Accordingly, the analysis does not evaluate the condition of systems that cannot be seen, such as buried structures and utilities. 4.1 STORM DRAINAGE Storm drainage on the property is via catch basins and open drain swales. The storm drain main line is located in the center of the street. Catch basins are located in the center of the street and on the sides of the streets. The drainage collected is discharged into the lakes where it feeds into swales that feed into the Parish storm drain system. Catch basins have required repairs in the past and repairs for two catch basins are in the current budget. 4.2 LAKES The Greens owns three lakes. The first is on the left side of the street at the entrance to The Greens. The second is one the right side of the street at the entrance to The Greens. This lake continues around the houses and contains two larger areas, the largest of which contains the large gazebo and walkway across the street from the Community Center. The third lake is further down Courtyard Drive beyond the houses on the right hand side of the street. The latter two lakes abut the golf course on the opposite side. One lake located behind the houses on Green Park Drive is owned by the golf course. The Greens HOA has no responsibility to maintain this lake. The Greens HOA is responsible for any lake restoration work. However, according to the restrictions, lot owners are responsible for maintenance of the areas from their property line to the lakes. This requirement reduces the footage of lake bank The Greens HOA is responsible to maintain. Some residents have been installing bulkheads or other measures to control bank erosion. All lakes suffer from bank erosion. The company under contract for chemical treatments for the lakes was contacted to provide input 4-1

13 Site Assets into the future maintenance and repairs. In a prior comment, it was stated that our lakes were becoming more like lagoons. Their recommendation is to form a committee to develop a plan for the lakes that would include the deepening of portions of the lakes. There was no cost estimate or suggestion on techniques for bank stabilization. Residents used a technique with cement bags to prevent erosion with good success. This technique is used in the financial evaluation bank repairs. Another estimate is developed for repairs for the bottom of the lakes. Critical areas for The Greens HOA to maintain are the banks in the common areas that are not to be maintained by lot owners. These would include the banks adjacent to the streets and brick walls on the lakes in the front of The Greens and the bank at the end of Greens Court. 4.3 STREETS The Greens has concrete streets with curbing only at the entrance area on Courtyard Drive and around the park island. The streets are owned and maintained by The Greens HOA. The street width varies but the majority is approximately 22 feet wide. The total length of streets is approximately 5000 feet. The streets are considered to be in fair condition because of the number of repairs that have been required. A number of deteriorated areas were repaired over the past three years using funding from the reserve fund. Money is budgeted for 2013 to continue repairs to damaged street paving and replace the stamped concrete paving at the entrance to The Greens. The stamped paving is cracked and deteriorated. Money is also proposed for crack sealing of the streets and parking areas. Streets normally have a long life, but the Streets Repair subcommittee has recommended budgeting repair funding on a five year basis based on the history of the street failures. This approach seems prudent and should be evaluated in the future to determine if it needs to be continued past that point. There are 23 street lights in The Greens. Street lighting is provided on decorative, 15-foot high, hollowmetal poles. Individual lights may require replacement and those funds would be covered by the operating budget. The reserve fund will cover the cost of replacement at the end of their life. 4.4 PARKING AREAS There are parking areas located throughout the community to provide visitor parking and off-street parking for the Activity Center and the Community Center. The Activity Center and Community Center have ADA 4-2

14 Site Assets designated spaces. The parking areas are concrete and need crack sealing to avoid deterioration similar to the work required in the streets. 4.5 SIDEWALKS Sidewalks were constructed on one side of the street in the first four phases of development, but discontinued thereafter. There is a washed stone sidewalk from the street to the large gazebo on the lake which has some uneven areas. There are sidewalks located in the island green space (Park) in the middle of Courtyard Drive. Portions of the sidewalks have been elevated by trees and required replacement. This work was completed in February LANDSCAPING There are a number of landscaping amenities located throughout the neighborhood to enhance the appearance. Decorative brick walls are located on both sides of the street at the entrance to The Greens. A small gazebo is located by the front lake. A large gazebo is located over the lake across from the Community Center with a wooden walkway providing access. A large island green space is located in the middle of Courtyard Drive toward the rear of community that includes sidewalks, concrete paved sitting areas with concrete benches, and a hut for mailboxes. Wood fencing is located around portions of the community providing a buffer from adjacent lands other than the golf course. This fence is for visual aesthetics while also providing some minimal security. The fence appears to be in fair condition for its age. The brick walls at the entrance are in need of some repointing. This work will be addressed as maintenance, but it causes concern because the brick is only 10 years old. This brick will require periodic inspection to assess the remaining life. Brick is typically completely repointed on a year periods. The estimated life of the brick in this study is reduced to 40 years to be more conservative because of some deterioration on the front walls and experience with other brick in the community. These conditions should be evaluated in the next update to determine if this assumption is still appropriate or a new life expectancy should be applied. The gazebos are in good condition. The big gazebo was re-painted in The mailbox hut on the island is in good condition. 4-3

15 Site Assets Two gas lanterns are located at the front entrance on the brick columns. The gas burns continuously and a more energy efficient light source should be considered for this area. 4.7 ACTIVITY CENTER The Activity Center consists of a 4-foot deep swimming pool in one area and a separate room with exercise equipment. The exercise room was created during a remodeling program in It replaced a small card room and a kitchen area that were not required after the completion of the Community Center. Six mailbox units for a portion of the community are located under the canopy at the entrance area. These mailbox units were replaced in 2008 and remain in excellent condition. It is a metal frame building with metal panels constructed on a concrete slab on grade. The canopy and its columns have stucco siding. The roof is pitched with a standing seam metal surface roof. There do not appear to be any issues concerning the structural systems of this building. The bottom portion of the siding required replacement a few years ago because the grading of the landscaping was trapping water next to building causing the metal siding to deteriorate. This condition has been fixed, but the siding condition will be considered fair until the next evaluation. The standing seam metal roof surface appears to be in good condition. Typically, this type of surface has a service life of 35 to 40 years before replacement is required. The electrical service is an underground circuit with the meter located on the south side of the building. The main electrical panel is located in the pool area. The electrical equipment is generally in good condition. No deficiencies were identified. There did not appear to be any issues of significance regarding the electrical systems at this time; however, the breaker panel is anticipated to need periodic maintenance due to being in the humid environment of the swimming pool. The interior lighting in the building is fluorescent. As part of efficiency improvements, the small incandescent bulbs in the exercise room were replaced with fluorescent bulbs. The water supply piping visible in the building is copper. The portions of the plumbing vent and drain systems that were visible for observation in the buildings are PVC plastic. There is one pair of ADA accessible restrooms. The restrooms are provided with toilets, sinks and showers. The majority of the plumbing system components are not visible for inspection. No problems were identified during inspection. 4-4

16 Site Assets The Activity Center is heated and cooled by two packaged air conditioning units with gas heating. One unit is rated at 3 tons and the other is 5 tons. This building also has a dehumidification unit rated at 8 tons. The 5-ton packaged unit is four years old and is in excellent condition. The other packaged unit is in good to fair condition. The dehumidification unit is a split system with one component outside and the other in the attic. This equipment appears to be in good condition. Replacement of these units is anticipated at the end of expected useful service life. Standard exhaust fans are located in the restrooms. A fresh air intake duct provides outside air to the humidification system. The ventilation equipment appears to be in good to fair condition. The pool is concrete with a coated surface. The surface was replaced in 2007 and has developed small areas where the surface material has come off. This will be addressed in the maintenance program. Resurfacing is typically on a ten-year cycle. The pool has a sand bed filter and a natural gas heater. The heating system has been a continuing problem since installation. This may in part be caused by the high water temperature which is maintained at 84 F at the requests of the residents, instead of a typical 78 F for an indoor pool. This higher water temperature also causes more evaporation and humidity in the building. The fitness room equipment was recently replaced with one commercial grade treadmill and a recumbent bike. Additional pieces that were in good condition were donated by residents. One donated noncommercial grade treadmill is in fair to poor condition and will likely need to be replaced within the year. Based on normal usage, the anticipated replacement of fitness equipment occurs on a 10-year cycle. There is a video security system in place but it is not working at this time. If the need arises again for surveillance of the pool area, replacement of this equipment will have to be considered. The windows are double pane glass windows. The Building, Grounds, and Maintenance Committee is investigating replacing the windows in at least the pool area with higher efficiency windows. Energy efficiency is a typical topic included with some reserve studies and this is addressed in Section COMMUNITY CENTER The Community Center is a multi-function building with five distinct areas. The first are is the lobby. On one side of the lobby is the grand ballroom, the largest open area with kitchen and bar facilities on the side. This area is typically used for meetings and parties and other functions with larger crowds. On the 4-5

17 Site Assets opposite side of the lobby is a combination card room and lounge. Beyond the card room is a billiards room. An office is located off the lobby. Each room has appropriate furniture for the use of the room. The Community Center is a concrete slab on grade building with stucco siding. The roof is pitched and covered with asphalt composition architectural shingles. The flooring is a mixture of wood and stone tile. There do not appear to be any immediate issues of concern regarding capital expenditures for the structural systems in the building. However, leaks in the roof and cracks in the stucco are being addressed by the Building, Grounds and Maintenance Committee. Typically, this type of shingle roof will have a service life of 25 years before replacement is required. The electrical service is an underground circuit with the meter located on the east side of the building. The main electrical panel is located in closet in the Grand Ballroom. The lighting in the foyer, grand ballroom and billiards room is incandescent flood lights. Lighting in the card room, bathrooms and bar areas is fluorescent. The water supply piping visible in the building is copper. The portions of the plumbing vent and drain systems that were visible for observation in the buildings is PVC plastic. There is one pair of ADA accessible restrooms located in the building. The restrooms are provided with toilets and sinks. The majority of the plumbing system components are not visible for inspection. No problems were identified during inspection. The Community Center building is heated and cooled by two 5-ton Carrier heat pumps and one, 5-ton split system air conditioning system with electric heat. Standard exhaust fans are located in the restrooms. The ventilation equipment appears to be in good condition. The HVAC equipment is in good condition. This type of equipment has a typical useful life of 15 years. The furniture in the lobby is not owned by The Greens HOA. It is anticipated that a transfer from the developer or some action will be agreed upon. The tables and chairs in the Grand Ballroom and the furniture in the card room and the billiard table were purchased by The HOA in The furniture in the office has been donated and will probably need to be replaced if and when a manager is hired for The HOA. The study assumes replacement of all of the furniture on a normal 10-year basis. * * * * * 4-6

18 Economic Analysis 5.1 INVENTORY 5.0 ECONOMIC ANALYSIS As noted in the Section 3, Approach, the first step of the analysis develops a table with the inventory of all assets The Greens HOA is responsible to maintain and repair. The quantity or size, the approximate year of construction or installation, design life, estimated unit costs and estimated replacement cost are included for each item in the inventory. The average year of installation is used in some cases for items such as streets that were constructed over a couple of years. Estimated costs are provided in the analysis for repair and replacement. These costs are based on our general knowledge of building systems and the contracting and construction industry. Routine maintenance of all assets is anticipated during the evaluation period to extend the life of the asset as much as possible. The inventory also includes items shown as having deficiencies that require repair. These items have been identified as major capital repairs and proposed for funding in the current or near-term from the reserve account. This complete inventory is shown as Table 5-1. While the costs to repair deficiencies are totaled, the replacement costs are not because they would not all occur at one time or in a reasonably close time frame as the deficiencies would. The inventory was developed to be as complete as possible for major items. As items are identified in the future that were not included in the list, they should be noted and included in subsequent revisions of the reserve study. Because of the $5,000 limit, items like the hot water heaters, refrigerator, video security system in the Activity Center and other kitchen appliances were not included in the inventory for cost estimating. After initial preparation, the inventory list was restructured to sort out and remove those items classified as maintenance or capital less than $5,000. Catch basin and damaged street repairs are subparts of a larger street repair project budgeted for 2013 and are shown even though they are less than $5,000 limit going forward. Items with a life expectancy over 40 years were also removed from the inventory list. As noted in a prior section, these items should be re-checked when the reserve study is updated to determine if there is deterioration that warrants shortening the expected life expectancy. The items should be placed in the analysis when the life expectancy or the end of life is projected to be 40 years or less. 5-1

19 Economic Analysis 5-2

20 Economic Analysis 5-3

21 Economic Analysis The revised replacement reserve inventory that will be considered for analysis is shown as Table 5-2. Major assets that have been removed include: streets (complete replacement), storm drain pipes, the metal siding on the Activity Center, stucco exteriors and the piles and support structure for the large gazebo. 5.2 FUNDING PLANS There are three funding plans commonly used by communities like The Greens. The plan chosen depends on the risk The Greens HOA wants to take. Each method attempts to maintain the adequate reserves. In summary the three plans are: Full funding: maintain the reserve at the 100 percent of the goal. Base-line funding: maintain the cash flow above zero. Threshold funding: maintain a minimum reserve fund and increase the annual contributions to build the fund to meet the future expenditures as needed. Full funding is the most conservative approach. Base-line funding has more risk because the fund can run short of cash if an asset needs to be replaced before the schedule in the reserve report. Threshold funding is the riskiest of the plans and given the historical problems with the streets and other assets; it does not seem like the wisest choice for a board, like The Greens HOA, that expressed conservative values in its financial plans. 5.3 RESERVE REQUIREMENTS Reserve Analysis The annual reserve funding requirement is calculated for each item based on the replacement cost and the expected life time. This amount is the annual contribution required to ensure sufficient funds are available for replacement of the asset when necessary. The full funding goal is calculated for each item using the annual funding requirement and the number of years the asset has been in service. For example, a $10,000 asset that is 50 percent through its useful life should have $5,000 in the reserve fund using a full-funding basis. The annual funding requirement and full funding goal are calculated for each asset in the reserve inventory. The total annual funding requirement is $23,382. This information is shown in Table 5-3, Reserve Funding Analysis. 5-4

22 Economic Analysis 5-5

23 Economic Analysis 5-6

24 Economic Analysis Reserve Fund Status The reserve fund status compares the current level of the reserve account with the full funding goal as shown in Table 5-3. As of December 31, 2012 the reserve fund was $56, This represents 43% of the full funding goal of $131,315. The reserve account paid $89,553 for street repairs over the past three years. These were deficiencies not expected to occur based on the typical life expectancy of streets. In addition, approximately $77,000 of repairs listed in Tables 5-2 and 5-3 are necessary and have been budgeted over the next five years that will delay the buildup of the reserve fund. 5.4 CASH FLOW A cash flow analysis is prepared to evaluate the ability of the current reserve fund balance and the annual reserve contributions to fund the reserve requirements. This is a yearly project ion of revenues and expenditures. The revenue is the sum of the annual contributions plus the balance of the reserve fund from the prior year. The annual contributions into the reserve fund are $240 per year per residence. Assuming an average of 130 homes, the annual contribution to the reserve fund is approximately $31,200. The annual expenditures from the reserve fund are projected using the replacement cost of each asset identified in Table 5-3 and the expected life of the asset over the 30-year study period. For example, an asset installed in 2002 with a fifteen year life is assumed to be replaced in 2017 and As recommended in Section 4.3, $35,000 is included as an expenditure for street repairs. The revenues and expenditures are added to develop the annual reserve fund balance. A summary of the Reserve Fund Cash Flow is presented in Table 5-4. The full table for this calculation showing the expenditures on a line item basis is included in Appendix B, Detailed Reserve Fund Cash Flow. An easier way to see the trend is by plotting the Cash Flow as shown in Figure 5-1. The annual contribution was shown at the current level for the next 20 years and then decreases to equal the amount needed for the full funding goal. The 20-year period for the higher level is the estimated time to build the reserve fund up to the full funding level without supplemental funds being added. Supplemental funding with excess from the operating budget would decrease the time to reach the full funding goal. 5-7

25 Economic Analysis 5-8

26 Economic Analysis $250,000 Figure 5-1 Reserve Fund Cash Flow with Full Funding Goal $200,000 $150,000 $100,000 $50,000 Reserve Fund Balance Annual contribution $ The higher fund amounts in the later years do not represent a windfall or excess as these funds are scheduled to be spent in the future to replace worn out assets. If the study period were extended over a much longer period the reserves would decrease. History has also demonstrated that many of our assets required major repairs or replacements before their scheduled end of life. There was a surplus in the 2012 operating budget and it is recommended that the Board transfer a reasonable portion of the surplus to the reserve funds. A prudent approach is to leave some of the surplus available as a cushion for unforeseen operating expenses. This recommendation is suggested for future years as well to increase the reserve fund closer to the full funding level. If the operating budget does not cover expenses as planned, the Board should consider increasing the dues rather than decreasing the amount of the contributions to the reserve fund. Operating costs are projected to rise as additional areas are dedicated to The Greens and the facilities require more routine maintenance. This analysis did not include escalation or inflation to adjust for either the replacement costs or the annual contributions to the reserve fund in future years. Interest rates have been at historically low levels and are 5-9

27 Economic Analysis projected to remain that way for a while. Escalation is often calculated at 3% per year in capital cost estimates. This 3% rate is probably within the range of accuracy of the cost estimates in the first few years which are the most critical. The use of these factors in future studies should be evaluated based on rates at that time. For comparison purposes, a cash flow chart was developed to demonstrate the projections using the baseline funding approach. This approach maintains a minimum reserve balance just above $0 over the study period. The result is shown in Figure 5-2. The annual reserve fund contribution to maintain this level is approximately $195 per year per residence or 80% of the full funding contribution level. This method assumes much more risk on the part of the Board and the homeowners because there are periods where very little funding is available to cover unexpected emergencies like the recent street repairs. The optional funding in such events would be larger lump sum assessments on the homeowners. That does not appear to be a risk worth taking for $4 per month. $140,000 Figure 5-2 Reserve Fund Cash Flow with Base-line Funding $120,000 $100,000 $80,000 $60,000 $40,000 $20,000 $0 Reserve Fund Cash Flow The Board of The Greens HOA is responsible for selecting its approach for reserve funding. To expand on a prior comment, it will take approximately 20 years to reach the full funding goal at the current 5-10

28 Economic Analysis contribution level. Figure 5-3 shows the cash flow of Figure 5-1 and adds in the full funding goal to provide a chart of the full funding goal and reserve balance being equal in Additional surplus transfers and unexpected expenditures like street repairs will affect the actual date. $300,000 Figure 5-3 Reserve Fund Catch-up to Full Funding Level $250,000 $200,000 $150,000 $100,000 $50,000 Reserve Fund Balance Annual Contribution Full Funding Level $ INVESTMENT POLICY In the best interest of the homeowners of The Greens, the maintenance and Reserve monies will be invested conservatively in the most risk free vehicles available, such as tax-free Money Market Funds, tax-free Income Unit Trusts, or tax-free Income Funds. These funds will provide liquidity and also preserve the community s monies in the safest possible investments. The Finance Committee should track the current trends of interest rates and specifically these investments to weigh the potential of capital erosion if the value of the investments begins to decrease. 5-11

29 Economic Analysis The cash flow analysis presented in Section 5.4 shows that the reserves will not have significant excess cash available for investment in the short term. Therefore, no long-term investment strategy has been presented. When the reserve account increase, the finance committee should evaluate placing a portion of the reserve account in a low-risk, longer-term investment to obtain greater yields. 5.6 ENERGY EFFICIENCY Energy efficiency is an area that attempts to reduce costs in a variety of ways. A number of these that would apply to The Greens are: Reduce the time something is operating to reduce energy consumption. Adjust the temperatures of the HVAC systems, higher temperatures during cooling and lower temperatures during heating. Replace an item with a more efficient product that decreases energy consumption and or extends the life of the product. The Greens has been moving to improve energy efficiency over the past few years and the Board of Directors desires to continue the effort. The first target of energy service companies offering conservation programs is lighting. First, because changing the lighting is the easiest thing to do. Second, the rewards are immediate and noticed on the next electric bill. This is good for the client as they see immediate benefits and the energy service company because they have satisfied clients. And third, the technology changes in lighting are occurring so rapidly that equipment suppliers say you can justify replacing the lighting in a large building if the existing lighting system is five years old. The Greens has been following a program to change any incandescent lighting to fluorescent in the buildings. Lighting in the outside areas around landscaping has been switched to solar power with a photo cell switch to minimize use. The street lights are a slightly different matter for security reasons, but they too may require a new bulb technology when it is time for replacement. The lights in the grand ballroom, card room and billiards room at the Community Center are incandescent flood lights operated by on-off switches. Fluorescent lights designed to replace this type of bulb should be considered when replacing these bulbs. The electrical circuits in these rooms do provide for lighting of individual sections instead of the entire room so energy consumption can be matched to occupation of the room. 5-12

30 Economic Analysis The swimming pool is maintained at a temperature that exceeds normal adult swimming set points. This temperature has been requested by the residents that use the swimming pool on a regular basis. However, from an energy conservation perspective, it should be acknowledged that the higher water temperature increases gas consumption to heat the water, increases electricity for the additional air conditioning and dehumidification of the pool room and water consumption is increased for greater make up of evaporation. * * * * * 5-13

31 Conclusions and Recommendations 6.1 CONCLUSIONS 6.0 CONCLUSIONS AND RECOMMENDATIONS In general, the assets of the community are in good condition but require attention and continued maintenance to keep them in that conditions. Certain items such as the streets and catch basins required unplanned expenditures and others may continue to appear. The Board of Directors has planned street and sidewalk improvements over the next few years that hopefully will limit annual expenditures in the future. Continued diligence in the preparation of the budgets is encouraged. As mentioned previously, the inventory should be periodically updated periodically to reflect changes in conditions and additions or modifications. The cash flow analysis shows that the reserve fund balance is below the suggested level for full-funding and will continue to be below that level for the next 10 years without supplemental funding. The funding of the Reserve Fund is not required by any of the governing documents of The Greens. The portion of the dues allocated to the Reserve Fund is established by the Board of Directors. The Board at its discretion can also transfer all or a portion of the surplus, if any, of the operating budget to the Reserve Fund. 6.2 RECOMMENDATIONS The following recommendations are presented in the study. They are summarized here: The full funding approach is a risk adverse method to provide long-term financial stability to The Greens. Its use is recommended for the setting of future contributions to the reserve fund. The reserve fund is currently underfunded for making the repairs necessary and getting to the desired reserve level of full funding. There was a surplus in the 2012 operating budget and it is recommended that the Board transfer a reasonable portion of the surplus to the reserve funds. This will shorten the timeframe to reach the full funding goal level. A prudent approach is to leave some of the surplus available as a cushion for unforeseen operating expenses. Review the inventory tables and cost estimates on a periodic basis not to exceed three years for the near-term. This timeframe provides additional evaluation on the projected expected life of the assets. A review after one year would be worthwhile to check the inventory and cost estimate. Energy efficiency should be pursued: 6-1

32 Conclusions and Recommendations o o Evaluate changing the flood light bulbs in the Community Center to higher efficiency bulbs as they require replacement. The largest energy user is the Activity Center. Do additional evaluation on the windows and pool heater. Check the pool heater to determine if it is properly sized for the water temperature settings when it is planned to be replaced. It was probably sized based on the water volume being heated to a lower temperature per design standards rather than the higher temperature requested by the residents that use the pool. The higher pool temperature increases the operating time and could contribute to shortening the life of the equipment. 6.3 DISCLAIMER This report was prepared on a volunteer basis by two members of Board of Directors of The Greens HOA. It was prepared using standards for this type of reports. The analysis and preparation of this report falls within their professional experience. Both members have been involved in operations and maintenance of facilities over the course of their careers. Short biographies of the authors are in Section 6.4. Craig Naden is The Greens HOA s treasurer and liaison to the Finance Committee; John Carlson is the liaison to the Building, Grounds, and Maintenance Committee. 6.4 RESUMES Craig H. Naden Graduated from Newark College of Engineering, Newark, N.J. in 1969 with a BS in Mechanical Engineering. Worked as Plant Mechanical Maintenance Engineer for E. I. Dupont, Monsanto, Occidental Chemical, and for previous 30 years BASF Corporation, before retirement 12/2012. Served as treasurer of the Sicklerville, NJ Jaycees and the Baton Rouge Commodore 64 Club prior to being elected as treasurer of The Greens HOA John E. Carlson Jr., P.E. Graduated from Rensselaer Polytechnic Institute, Troy, N.Y. in 1968 with a B.S. in Mechanical Engineering. Licensed Professional Engineer in Louisiana and other states. Prior experience in power generation. Over 20 years of experience in engineering consulting in utility and facility fields, including site evaluations, economic feasibility studies and utility rate studies. Managed a steam and chilled subsidiary of Entergy and currently serves as its Director of Engineering. * * * * * 6-2

33 APPENDIX A - Photographs

34 1. The right brick wall at the entrance to The Greens. 2. The left brick wall at the entrance to The Greens. A - 1

35 3. Cracking in the stamped concrete at the front entrance. 4. The lake on left at the entrance to The Greens. A - 2

36 5. A close-up of the erosion occurring at the banks in the front lake. Typical of all lakes. 6. The gazebo at the front lake. A - 3

37 7. A section of recently repaired sidewalk the day after the repairs. 8. The lake to the right of the entrance to The Greens. This lake drains into the lake across Courtyard Drive. A - 4

38 9. A portion of the lake to right at the entrance to The Greens behind the houses on Courtyard Drive. 10. The Activity Center. A - 5

39 11. The mail box units located under the entrance cover at the Activity Center. 12. The Community Center A - 6

40 13. A section of the fence located behind the Community Center. Similar fence is located throughout the community. 14. Fencing alongside the Community Center. A - 7

41 15. The Community Center lobby. 16. The Community Center grand ballroom. A - 8

42 17. The Community Center card room/lounge. 18. The Community Center kitchen with bar area in the background. A - 9

43 19. The walkway to the large gazebo. 20. The bridge to the large gazebo. A - 10

44 21. The large gazebo and the pile support structure. 22. The Park area. A - 11

45 23. The mail box hut in the Park area. 24. The last lake on the right at the end of Courtyard Drive. A - 12

46 APPENDIX B Memorandum of Understanding with the Townhomes

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