Problems & Solutions
Six issues were brought up in the Reserve Study done by Hawaiiana and the current board of directors. The two previous management companies, Associa Hawaii and Touchstone, also did Reserve Studies but did not have the same recommendations. COLGW proposes we come up with common sense solutions to the recently determined six issues, many of which can be implemented over the course of several years. Preventative maintenance and repairs can certainly address many of these mentioned issues. A good example is our neighboring condo building Diamond Head Vista, built in 1975. According to the manager, their approach to sewage pipes is repair and replacement only when needed, as they are constructed to last 50-75 years. The board and resident manager at Waikiki Banyan are excellent, major work is almost complete - without any special assessments or increase in maintenance fees. Royal Iolani has also been doing very well at keeping special assessments to a minimum for owners there. For details regarding our proposed solutions, please look at the drop down menu under Reserve Study. Any owners with a background in engineering or construction who may have relevant ideas to offer... please let us know!
WHAT IS A RESERVE "STUDY"?
A reserve study is a long-term capital budget planning tool which identifies the current status of the reserve fund and a stable and equitable funding plan to offset ongoing deterioration, resulting in sufficient funds when those anticipated major common area expenditures actually occur.
Our Reserve Study 2018 was done by Armstrong Consulting Inc President Finn Armstrong below is the link to their website.
Finn Armstrong, C.M.A.Reserve Specialist
Finn Armstrong is a Construction Manager and Reserve Specialist #176. He has over 14 years of experience in working with various construction projects. His field knowledge includes various applications of foundation work, steel and wood framing, painting, roofing, custom tile and stone projects, and landscaping. Finn is advancing his studies with continuing education.
Below a more in depth look at how a Reserve Study & Budget relate to one another.
AOAO 2019 net income statement and reserve study comments:
Revenue Maintenance fees $ 2,652,282
Sp. Assessment 10,774,125
Other income 253,020
Total income $ 13,679,427
Fixed/variable $ 2,404,884
Trans to reserve 11,274,543
Net income 0
When planning a budget the maintenance fee income category is the last item calculated and is the amount required to balance the budget so income and revenue are equal. In the above example maintenance fees has to be $2,652,282 so net income will be zero. A very simplistic example is: if you lower the transfer to reserve amount from $11,274,543 by $1,000,000 the new expense total would be $12,679, 427 and the maintenance fee revenue would be reduced by $1,000,000 to $1,652,282 so the income total will match the expense total. Please note this is an overly simplistic example.
The expense budget typically includes two categories of expenses-operating which are the day to day type and capital which are improvements to the land and structures. All revenue is operating and the expenses include an estimated expense transfer out of the operating account and into the reserve account monthly, additionally, at year end any profit is transferred to reserve while a net loss must be made up as losses are not allowed under Hawaii law. In the above examples the revenue from the special assessment is 10.774 million while the transfer to reserve is 11.275 million. Presumably the difference is the 2019 estimated/budgeted profit.
With respect to expenses- fixed expenses are those which the board has little to no control over and include: cable, water and sewer, gas, insurance etc. Variable expenses-ie those the board has some control over include: payroll, electricity, building and grounds maintenance etc.
The main category the board has control over is the reserve account and the amount budgeted and transferred to it from the operating account.
For example in the current budget the BOD has chosen to pay for 35 projects in 2019 even though that much work cannot be accomplished in a single year, further the consequences of that decision was the $10.774 million assessment.
An alternative to the above approach would be to defer some/all of the projects to 2020 and beyond. In order to calculate the savings accrued by this method you will need your own software to run various scenarios of inclusion/exclusion of certain capital projects in any given budget year (you also need the raw data) or you need to have Hawaiiana run the alternatives for you. (Please note that this process starts in mid summer and concludes in the Oct/Nov time frame in order to approve a budget and the related maintenance fee increase).
Previous boards have done this in conjunction with their PM firms, it is time consuming as you need to try a lot of combinations to find the right set. These boards and their PMs have followed this approach over the years and has passed audit every year and never had a special assessment.
Another alternative is to reserve at less to 100% for 2019 and in fact the reserve study includes such calculation. Of course if you defer all of the proposed 2019 projects some may fail and an emergency repair may be required. Also you will need to budget extra for the deferred items as it may cost more to do in a future year. (see the top of page 4 of the budget for the 60 and 50% results).