A Blueprint for Innovation…
Construction of a Comprehensive Tool for Management of Capital Assets
March 2009
SCHEDULE
•
The Reserve Study
The Reserve StudyoWhat
WhatoWhy
WhyoWho
WhooWhen
WhenoHow
How•The Exercise
The Exercise•Cost Reduction Techniques
Cost Reduction TechniquesoValue Engineering
Value EngineeringoLife Cycle Analysis
Life Cycle AnalysisoComprehensive Approach
Comprehensive Approach•BREAK
BREAK•Energy Reduction
Energy ReductionoBuilding Audits
Building AuditsoReport
ReportoROI
ROIoRevolving Energy Fund
Revolving Energy FundoFunding Options
Funding OptionsoGovernance
Governance•Open Forum / Q + A
Open Forum / Q + APresenters: Erin Alicata - Ass’t V.P. Associations Banc
Robert J. Burns, P.E., R.S. Burns Associates-Engineers
David Borden – State Representative for Rye and New Castle
Paul Bottum – Owner Audits UnlimitedMark Connelly, Esq. – Attorney in Private PracticeDevelopment of a Comprehensive Tool for Management of Capital Assets
WHAT IS A CAPITAL RESERVE FUND STUDY?
A Capital Reserve Study:
•Documents the present condition of the common area components. We are dealing here with just the common area components of the association as defined in your documents - everything outside the unit boundaries.
Documents the present condition of the common area components. We are dealing here with just the common area components of the association as defined in your documents - everything outside the unit boundaries.•Determines their probable future service lives
Determines their probable future service lives•Computes the costs to replace them
Computes the costs to replace them •Designs their replacement schedule
Designs their replacement schedule•Produces a work product in three parts:
Produces a work product in three parts:oAn Analysis of Present Funding tells you how well the amount you now have in reserve will support the replacement schedule. Any shortfall becomes apparent. In our exercise, we will generate an Analysis of Present Funding.
An Analysis of Present Funding tells you how well the amount you now have in reserve will support the replacement schedule. Any shortfall becomes apparent. In our exercise, we will generate an Analysis of Present Funding.oRecommendations for actions to take regarding the funding of your reserve account going forward.
Recommendations for actions to take regarding the funding of your reserve account going forward.oA Cash Flow Analysis in spreadsheet format incorporates the recommendations, then projects what your expenses will be for the next twenty years plus what your annual contribution to reserve should be year-to-year. Armed with that, you can set the reserve portion of your budget and monthly fees for the homeowners.
A Cash Flow Analysis in spreadsheet format incorporates the recommendations, then projects what your expenses will be for the next twenty years plus what your annual contribution to reserve should be year-to-year. Armed with that, you can set the reserve portion of your budget and monthly fees for the homeowners.WHY DO A RESERVE FUND STUDY?•Protect the value of your property.
Protect the value of your property. oAdequately funding of your reserve account protects and enhances the physical assets of the community. In so doing, it protects the investment each homeowner has made when buying into the community.
Adequately funding of your reserve account protects and enhances the physical assets of the community. In so doing, it protects the investment each homeowner has made when buying into the community.oThe physical appearance, the “curb appeal”, of your property sends a clear signal of perceived value to buyers and appraisers.
The physical appearance, the “curb appeal”, of your property sends a clear signal of perceived value to buyers and appraisers.oLenders consider a strong reserve position as enhancing the equity in a property. Included in the transfer of the property goes a percentage share of the reserve fund.
Lenders consider a strong reserve position as enhancing the equity in a property. Included in the transfer of the property goes a percentage share of the reserve fund.•Ensure fairness
Ensure fairnessoProvides a way to make sure everyone is contributing their fair share of the costs during the time they benefit from the commonly owned assets. Without a reserve study, it’s impossible to know what the “fair share” is.
Provides a way to make sure everyone is contributing their fair share of the costs during the time they benefit from the commonly owned assets. Without a reserve study, it’s impossible to know what the “fair share” is. •Avoid special assessments
Avoid special assessmentsoThe major assets of a CID need to be capitalized for replacement at the end of their anticipated service lives. Being unable to do so beause of inadequate planning leads to deferred maintenance which is a recipe for special assessments at higher costs.
The major assets of a CID need to be capitalized for replacement at the end of their anticipated service lives. Being unable to do so beause of inadequate planning leads to deferred maintenance which is a recipe for special assessments at higher costs. •Fiduciary Responsibility
Fiduciary ResponsibilityoMembers of the Board of Directors have a fiduciary responsibility to execise prudent business judgement in protecting the invested value of the “stockholders” – the membership of the association. They could be held liable for failure to meet that responsibility.
Members of the Board of Directors have a fiduciary responsibility to execise prudent business judgement in protecting the invested value of the “stockholders” – the membership of the association. They could be held liable for failure to meet that responsibility.•Better Than Year-to-Year Operation
Better Than Year-to-Year OperationoRe-inventing the wheel each budget time leads to sporadic levels of contributions to reserve.
Re-inventing the wheel each budget time leads to sporadic levels of contributions to reserve.oDefeats the ability to predict negative reserve balance.
Defeats the ability to predict negative reserve balance.oDisallows passing on to succeeding boards any consistent strategy.
Disallows passing on to succeeding boards any consistent strategy.•The “Midas Muffler Factor”
The “Midas Muffler Factor”o“You can pay me now, or you can pay me later.” The deterioration of physical assets will take place whether planned for or not. Do it “later” and it will invariably cost more. It only makes good business sense to plan prudently now.
“You can pay me now, or you can pay me later.” The deterioration of physical assets will take place whether planned for or not. Do it “later” and it will invariably cost more. It only makes good business sense to plan prudently now.WHEN SHOULD A RESERVE FUND STUDY BE DONE?
•Any time is a good time to do a reserve study. It is just sound business practice.
Any time is a good time to do a reserve study. It is just sound business practice.•When transitioning from developer to Board control.
When transitioning from developer to Board control. oThe data gathered during the inspection and analysis phases of the transition study dovetail directly into a reserve study.
The data gathered during the inspection and analysis phases of the transition study dovetail directly into a reserve study.•When there is any uncertainty about where you stand - what the contribution to reserve should be.
When there is any uncertainty about where you stand - what the contribution to reserve should be.•A reserve study should be updated about every three to four years.
A reserve study should be updated about every three to four years.•When previous Boards have not made any adjustment in the contributions to reserve despite clear increases in construction costs and general inflation.
When previous Boards have not made any adjustment in the contributions to reserve despite clear increases in construction costs and general inflation.WHO SHOULD DO A RESERVE FUND STUDY?
•Someone with direct experience in building and site technology that facilitates informed judgments about the performance of materials and the costs to maintain and replace them.
Someone with direct experience in building and site technology that facilitates informed judgments about the performance of materials and the costs to maintain and replace them.•Building engineers and architects are engaged in this kind of work routinely. They are licensed and their practices monitored by state statute.
Building engineers and architects are engaged in this kind of work routinely. They are licensed and their practices monitored by state statute.•Reserve Specialist (RS) is a professional designation of CAI. It informs the public that the person has demonstrated the special competence needed to perform capital reserve studies for common interest developments (CID).
Reserve Specialist (RS) is a professional designation of CAI. It informs the public that the person has demonstrated the special competence needed to perform capital reserve studies for common interest developments (CID). HOW IS A RESERVE STUDY DONE?
ANATOMY OF A CAPITAL RESERVE STUDY
The key finding of the study.
It compares the amount presently in
reserve with the amount required
for a fully funded condition. Using
that finding, recommendations are
made for annual contributions to
reserve in the form of a twenty-year
cash flow projection.
Electronic format facilitates continuous future upgrading and what-if scenarios.
Work product becomes a truly interactive reserve management tool.
Happy Meadow Condominium
Just Below the Notch, NH
The property:
•20 Townhouse style structures – 40 units
20 Townhouse style structures – 40 units•Constructed 1987 - 1992
Constructed 1987 - 1992•Clubhouse with common room and outdoor pool
Clubhouse with common room and outdoor pool•40 decks as limited common area
40 decks as limited common area•This will be their first Reserve Study
This will be their first Reserve Study •Reserve Fund Balance = $18,000.
Reserve Fund Balance = $18,000. •Annual contribution to the reserve fund = $17,000. The Board has decided to increase contribution to reserve going forward at a rate of 4% to match inflation.
Annual contribution to the reserve fund = $17,000. The Board has decided to increase contribution to reserve going forward at a rate of 4% to match inflation.FUNDING LEVELS
Common sense definition of adequate level of reserve funding = sufficient to enable you to set aside capital for future needs while at the same time taking care of current expenses.
Statutory funding is based on local statutes which set aside a specific minimum amount of reserves as required by law. There is no such requirement in the NH Condominium Act.
Baseline funding is an approach to keep the reserve cash balance above zero at all times. This means that while each component may not be fully funded, the reserve balance should not drop below zero during the projected period. Recommended for those who like to live on the edge.
Threshold funding is based on the baseline funding concept, but allowing a minimum reserve cash balance as the threshold. It relies upon a predetermined dollar amount as the threshold. Better that Baseline Funding. It invites perennial discussion over what the “threshold” shall be.
Fully Funded = an easy mathematical exercise that evenly apportions the contributions to reserve by dividing the future replacement cost by the remaining life of the component in years. California statute sees fully funding as one well-intentioned method of protecting unit owners against loss of property value. The California statute, however, does not require it.
It is difficult to initiate the fully funded concept if the association has been operating for a while. A jump in contributions may be needed to get on to the “track” of a fully funded condition. Fully funding can be non-responsive to the nature of the physical components of the association. For example, an association’s roads and roofs have about the same service life – twenty years. Peak needs for cash at their replacements may be impossible to meet using fully funding.
Fully funding could result in carrying a sizeable reserve balance when there is no need for cash – when there are no significant current expenses.
Component Specific Funding = modification of fully funded that capitalizes current and future expenses with varying, gradual steps in contributions to reserve. It matches cumulative depreciation of the common area components with commensurate contributions to reserve. It attempts to avoid building up the reserve fund during periods when it is not needed.
DESIGNING A BAIL-OUT FOR HAPPY MEADOWS CONDOMINIUM ASSOCIATION
•What are the options for Happy Meadows to get back into a positive cash flow?
What are the options for Happy Meadows to get back into a positive cash flow?•How would they go about putting the options in place?
How would they go about putting the options in place? •How would the options affect the monthly fees?
How would the options affect the monthly fees?•Are there governance issues involved?
Are there governance issues involved?VALUE ENGINEERING
Generic definition: A systematic approach to reduce the cost of a product while continuing to provide an equal or enhanced level of performance.
A.Historical
Historical •Larry Miles at GE
Larry Miles at GE•Navy and submarines
Navy and submarines•Misuse of VE by construction managers (schools as example)
Misuse of VE by construction managers (schools as example)B.Specific definition:
Specific definition:•What is the function of the component?
What is the function of the component?•What is the present cost of the component?
What is the present cost of the component?•What else will satisfy the function?
What else will satisfy the function?•How much does that cost?
How much does that cost?C.Applying VE to building and site components
Applying VE to building and site components Function.
Defined as the service the component provides, e.g.:
•Roof shingles protect the wood roof sheathing and deny water contact and eventual entry into the building.
Roof shingles protect the wood roof sheathing and deny water contact and eventual entry into the building.•Siding protects wall sheathing, sheds water and adds architectural interest.
Siding protects wall sheathing, sheds water and adds architectural interest.•Roadway pavements provide a surface that enhances rideability and safety, freedom of vehicle damage, continual filling of erosion.
Roadway pavements provide a surface that enhances rideability and safety, freedom of vehicle damage, continual filling of erosion.Function is the controlling variable in the analysis. Unless the function of the component is provided then no cost reduction can be justified no matter how significant it is. And in CID, function can be closely related to quality as we will see in a moment.
Performance may be related to the design criteria for the component, e.g., thickness of pavement overlay, performance of thermal insulation, size of drainage culvert.
Present Cost
Can be obtained from invoices and or bids. You may need to refine the data to get common terms such as cost per square foot. This is necessary when comparing alternate materials.
What else will satisfy the function?
This is an opportunity for reverse engineering by working from the present condition back to the design criteria. Perhaps the initial material was a poor selection as evidenced by its costly maintenance over time.
Do research for new materials and/or techniques. Then determine if they will provide the performance required. Here is where the level of quality or aesthetic appearance of the new material can play a part. The classic case is the love – hate relationship of vinyl siding.
How much will that cost?
Here we’re interested in total cost – labor, material and don’t forget future maintenance cost. The latter may be the very reason why you’re doing this analysis. It is not usually necessary to adjust the cost of the present condition and that of the challenger for inflation since they should both be affected uniformly.
Conclusion
The usual manner of judging the feasibility of adapting the cost reduction alternative is to perform a ROI analysis.
Example: VE siding study
Existing Condition:
Paint vertical board siding every five years. Repair wood siding as part of prep work for painting.
Alternate:
Remove existing wood siding and install composite material vertical boards.
Cost – Existing:
Repair labor: $420 + material $300 = $720
Paint labor: $960 + material $200 = $1160
Total = $1880 x 7 buildings = $13,160Cost – Alternate:
Remove existing siding labor: $960
Install composite vertical boards labor + material: $2.90 / sf x 2,126 sf = $6,165
Total $7,125 x 7 buildings = $50,000Performance evaluation:
Existing board siding functions satisfactorily but provides opportunity for water penetration at shrinkage gaps. Random replacement will be on-going until all cases requiring correction are addressed. Painting will continue to be required. Composite board siding will provide a uniform weathertight envelope and will not require future maintenance.
60
40
$1000
20
4 8 12 16 20 24
Years
Conclusion: The break even point for replacement with composite siding occurs at year fifteen. Before that time, all cases where gaps in existing wood siding may have been corrected. Replacement with composite siding is not recommended based on the conditions presented in this analysis.
LIFE CYCLE ANALYSIS
A systematic approach toward capturing all costs associated with producing a product.
Toyota: Life Cycle Assessment = Comprehensive analysis throughout the life of a car from material and parts production to maintenance and disposal. This analysis has been applied to most new Toyota models since 2001.
General expression:
Life Cycle Cost = Initial Cost + Installation Cost + Cost of energy to Run + Routine Maintenance Cost + Downtime Costs + Environmental Damage Cost + Disposal Costs
Application to Condo building and grounds:
Life Cycle Cost = Initial Cost + Maintenance Cost + Damage Costs + Replacement Cost
Roadway Pavement Example:
Life Cycle Cost = + +
Initial Cost Replacement Cost
Conclusion:
The cumulative cost of the pavement (or any component) needs to be analyzed in terms of its life cycle. A maintenance program does add incremental annual costs. But this pushes the year of replacement of the roadway ahead, lengthening its service life, thereby reducing its life cycle cost.
LIFE CYCLE ANALYSIS – ASPHALT PAVEMENTS
“Research indicates that with a routine maintenance program, the service life of a pavement can exceed its initial design life. There can be a return of 10 to1 for every dollar spent on a maintenance program.”
Center for Transportation Research U. of Texas – Austin
Effect on Service Life of a Maintenance Program
Performance
Inflection point eliminated
ExcellentPerformance characteristics changed
Performance characteristics changed Good
Fair
Poor
Very Poor
Failure
5 10 15 20 25 30 Service Life -Years Extension of service life
Repairs made as needed
Maintenance Program in place
COMBINING OPERATING AND RESERVE ACCOUNTS
Recall that in our Life Cycle Analysis we decided to include maintenance and repairs as elements in the total life cycle cost of a common area component.
River Grant Condominium Association in Contoocook has begun integrating operating costs for their common area components into the reserve study work product.
The spreadsheets that follow describe their efforts to date.
SUMMARY AT BREAK
We have covered:
•The how, what and why of the basic reserve study
The how, what and why of the basic reserve study•Prepared an analysis of present funds – one element of a reserve study
Prepared an analysis of present funds – one element of a reserve study•Viewed a cash flow projection for a reserve study
Viewed a cash flow projection for a reserve study•Had a look at some techniques to reduce the costs that feed into the reserve study
Had a look at some techniques to reduce the costs that feed into the reserve study•Seen how operating expenses might be integrated into a reserve plan.
Seen how operating expenses might be integrated into a reserve plan.We’ve just about completed the design of our comprehensive management tool. Next, after this break we’ll look at how we might go about making energy reduction part of our model.
ENERGY CONSERVATION PROJECTS
We’ve all heard the grim statistics about where our wanton dependence on foreign sources of energy has taken us. Let me just put a little different focus on it for us.
The average energy use of commercial building in 2002 was 250 kWh/m2. This is equal to the energy use of a commercial building built in 1920. In other words, a masonry building built without insulation nearly 100 years ago consumed the same amount of energy as today’s shiny, glass and metal clad buildings. There are no comparable figures for low to mid-rise residential buildings but there is no reason to believe they are the heroic exception. The undeniable fact is that architects and engineers have not had to consider energy consumption as a vital design criterion. That paradigm has changed forever. It takes us back to our life cycle analysis:
The cost of heating and cooling our buildings now needs to be included in the total cost of operation and ownership.
But wait a minute. We have an enormous source of alternative energy all around us. It’s called energy conservation and, when you think about it, it’s the lowest cost of new energy that we have at hand. The question becomes not if we should conserve energy but how. How specifically can that be done for the kinds of buildings that configure condominium associations?
Here’s how I suggest we need to do it:
•By systematically using recognized techniques.
By systematically using recognized techniques.•In a manner that addresses the specific building configuration
In a manner that addresses the specific building configuration•By using a methodology that can demonstrate an acceptable ROI
By using a methodology that can demonstrate an acceptable ROI•In a manner that allows the results to be objectively verified.
In a manner that allows the results to be objectively verified.And the specific tactics for doing that would be:
First – audit our buildings to find out how they are losing energy
Second – design the techniques to cure those losing conditions
Third – executing a plan that puts the energy reduction techniques in place.
Paul is going to lay out for us in fine detail just how can go about auditing our buildings.
There are two types of Energy Audits
•Basic
Basic•Comprehensive
ComprehensiveBasic Energy Audit
•Visual – A complete walk through, in, and around the home, attic, basement, and exterior
Visual – A complete walk through, in, and around the home, attic, basement, and exterior•Focus – Age and condition
Focus – Age and conditionoInsulation Levels
Insulation LevelsoHVAC Equipment
HVAC EquipmentoHeat / Cool Distribution
Heat / Cool DistributionoLighting, and time in use
Lighting, and time in useoCaulking and Weather stripping
Caulking and Weather stripping oWindows
Windows•Structured interview with occupants
Structured interview with occupants•Approx 1 to 1.5 hours
Approx 1 to 1.5 hoursBasic Energy Audit Strengths
•Low expense to homeowner
Low expense to homeowner•Low cost to deliver services
Low cost to deliver services•Catch major issues
Catch major issues•Experienced auditor can find key areas for improvement
Experienced auditor can find key areas for improvement•Most effective when improvement measures are low-cost or no-cost or obvious in nature
Most effective when improvement measures are low-cost or no-cost or obvious in natureBasic Energy Audit Weaknesses
•Advice given is general in nature
Advice given is general in nature•Won’t quantify savings-to-investment ratio (SIR)
Won’t quantify savings-to-investment ratio (SIR)•Less likely to result in “energy improvement” action
Less likely to result in “energy improvement” actionComprehensive Energy Audit
•All the elements of Basic Energy Audit
All the elements of Basic Energy Audit•More time, minimum of 2 hours + based on sq ft
More time, minimum of 2 hours + based on sq ft •Performance Testing
Performance TestingoFHA duct tightness
FHA duct tightnessoBuilding Tightness with Blower Door
Building Tightness with Blower DooroPinpoint invisible problems with Thermal Imaging
Pinpoint invisible problems with Thermal ImagingoCombustion Efficiency Testing
Combustion Efficiency TestingoIndoor Air Quality (IAQ)
Indoor Air Quality (IAQ)oMold Detection
Mold Detection•Energy Performance Modeling - Software
Energy Performance Modeling - SoftwareoImprovement Options
Improvement OptionsoSuggestions for Individual Actions
Suggestions for Individual ActionsoEconomic Analysis – per option and total
Economic Analysis – per option and totaloEnergy reduction per option
Energy reduction per optionComprehensive Energy Audit Strengths
•Thorough Evaluation
Thorough Evaluation•Performance testing sets baseline for capturing improvement value
Performance testing sets baseline for capturing improvement value•Economic Analysis quantifies return of investment for each improvement
Economic Analysis quantifies return of investment for each improvement•Exhaustive feedback to homeowner
Exhaustive feedback to homeowner•Most effective when problems are severe
Most effective when problems are severeoDirty furnace
Dirty furnaceoMissing insulation
Missing insulationoLeaky heat distribution system
Leaky heat distribution systemoPossible CO path into home from garage under
Possible CO path into home from garage underoEvidence of mold and mildew
Evidence of mold and mildewoBroken or missing windows
Broken or missing windowsComprehensive Energy Audit Weaknesses
Requires more upfront investment of time and equipment
Requires more upfront investment of time and equipmentAudit and review of audit results take longer
Audit and review of audit results take longerSometimes “too much” information
Sometimes “too much” informationWho Should Do Energy Audits?
•Everyone and Anyone !!?
Everyone and Anyone !!?•Window Salesmen !!?
Window Salesmen !!?•Or
Or•Trained, certified professionals using standard practices and quality standards
Trained, certified professionals using standard practices and quality standards The Economics
•Example Townhouse Configuration
Example Townhouse Configuration•Cost of Energy Improvements
Cost of Energy Improvements•Projected Energy Reductions
Projected Energy Reductions•Return on Investment
Return on Investment•
Lessons Learned
•High energy bills are the primary stimulus for consumer demand
High energy bills are the primary stimulus for consumer demand•Audits without actions benefit no one
Audits without actions benefit no one•Free Audits do not generate energy improvement actions
Free Audits do not generate energy improvement actions•Professionally performed Audits with well documented findings facilitate change
Professionally performed Audits with well documented findings facilitate changeInvestment in Energy Improvement Happens If
•The options are defined
The options are defined•Benefits to the home and occupants are clear
Benefits to the home and occupants are clear•A value has been established
A value has been established•It is easy to take action
It is easy to take actionBenefits to Borrowers
•Remedial measures have known costs
Remedial measures have known costs•Savings are realistically scoped
Savings are realistically scoped•Informed decision process puts a cap on the amount borrowed
Informed decision process puts a cap on the amount borrowed•Unnecessary long-term debt avoided
Unnecessary long-term debt avoidedBenefits to Lenders
•Only Targeted amount loaned
Only Targeted amount loaned•Return on Investment documented
Return on Investment documented•Risk in lending substantially reduced
Risk in lending substantially reduced•Probability of loan repayment increased
Probability of loan repayment increased•More participants serviced with finite program funds
More participants serviced with finite program fundsENERGY AUDIT SURVEY TOOLS
Minneapolis Blower Door
Used to depressurize the building and exaggerate the paths where energy is wasted. When used in conjunction with the IR camera pictured below, the results can be startling. The blower door is the single most important tool that the auditor will use. Even if there are no other diagnostic tools available, the blower door is essential to conduct a science-based evaluation of the leakiness of the building.
Infrared Camera
Although not completely essential, the IR camera presents a striking visual addition to the data gathered by the blower door. Invisible problems, hidden by the structure, such as water leaks, live knob and tube wiring, missing or poorly installed insulation, and infiltration paths are revealed with the IR camera.
Bacharach Fyrite Pro 125
A professional level combustion diagnostic tool which allows "one-hole" testing for furnace or boiler efficiency.
TI-86 Calculator contains proprietary software that is used to calculate (among other things) the Building Tightness Limit (BTL). This sets a lower limit on the CFM, as measured by the blower door, that the house can be brought down to, and still maintain a healthy Indoor Air Quality (IAQ).
WHAT IS THE RATIONALE THAT SUPPORTS DOING ENERGY REDUCTION PROJECTS?
In the larger sense, reducing the present level of our energy consumption is a national priority.
In order for new forms of energy to become economically viable, our energy demand needs to be reduced. The ROI of new energy forms looks better and better, becomes more feasible, as the load to which they are applied reduces.
So energy reduction by condominium associations becomes doing the right thing. Still that idea, ethical as it may be, has to carry its own weight with at least some sort of economic rationale.
“Doing the right thing” can mean initiating energy projects by condominium associations that benefit their homeowners. Once the first projects are completed, the association can reasonably ask those initial homeowners to contribute to a revolving energy fund, some of the savings from the energy reduction in their units. Now the association can do more energy reduction projects for the remaining homeowners. And when all energy projects are completed, the economic benefits to all homeowners continue to accrue. The value of the association’s property has been enhanced.
Just as LEED designed and constructed commercial buildings now bring in higher lease rates, so too CID’s that are operating at low energy levels will generate greater equity value.
The “right thing” becomes the smart thing to do.
