Robbie Pepper, CMCA, CCIM, GRI
Recently while attending the CAI Convention in Orlando, I attended a presentation during some training provided by Marc Tamres and Michael Arulgnanendran of Homerun IQ.
The presentation started out with the question, “what is the real rate of inflation relating to the costs of materials and services required in HOA reserve maintenance and reconstruction”. I immediately piped up (being the know it all that I am) and said, “It’s way more than the usual 3% we normally use for inflation, in fact I bet it’s close to double that, probably an additional 2.5%”. As Marc went to the next slide that stated it was an additional 2.5%, the attendees looked at me and asked how I knew that. I confessed “I guessed”. Ha!
Really though I knew it was quite a bit more just from looking at past reserve studies that I have been updating or providing a new report for.
Which takes us into the next section which is always a point of contention. Standards in reserve studies generally require or advise the association to be 100% funded.
Many providers have now realized that 100% funded may not be the best option and here’s why.
Marc pointed out that many associations with a lot of money in reserves do not invest their reserve funds in the highest and best returning investments. Particularly if a reserve fund is simply sitting in a checking account earning almost nothing. A couple of slides later I could see that with the much higher inflation than usually assumed and not invested wisely could result in a loss of 20% or more while being 100% funded over the next 30 years. OUCH!
There are many investment options out there starting with a high interest online savings account which may return 2.3% or more interest. There are many other investment options available with higher risk and degrees of liquidity that will earn more. Since we compound inflation annually, consider that if the association is sitting on a lot of money, they need to at least earn 5%-7% just to break even on their reserve fund over the course of 30 years. Investments of 1% return on a big chunk of change are not going to cut it.
My new way of thinking is that it may not be such a good idea for the association to be so highly funded. First, I urge associations to spend the reserve fund money they have in their account to take care of deferred maintenance sooner rather than later, as the longer it is deferred the more it will cost as it continues to deteriorate.
Second, maybe a reasonable and comfortable threshold funding level such as 40% to 70% may be more appropriate depending on the age and condition of the association and their own unique risk tolerance.
And third, find a good investment advisor.
Robbie Pepper, CMCA, CCIM, GRI
https://www.linkedin.com/pulse/why-100-funding-standard-reserve-studies-may-right-robbie/