Association Reserve Studies and Hawaii’s Act 199
These days the world is buzzing with AI. With products like ChatGPT by OpenAI and Google’s recent release of Bard, generative AI has taken the world by storm.
SmartProperty Founder and CEO Damian Esparza recently had the pleasure of sitting down with ThinkTech Hawaii for an exclusive interview for their Condo Insider series. Read on for a deep dive into the latest technology in reserve studies and recent legislative changes impacting community associations in Hawaii.
[Interviewer]: Damian, can you tell us more about SmartProperty and its role in serving property managers and condominium associations?
[Damian]: Yes, SmartProperty is a comprehensive asset management platform designed specifically for community associations, including association management firms and condominium associations. Our system is cloud-based, allowing users to access information anytime, anywhere. We believe that the information needed to make funding and repair decisions should be easily accessible and constantly updated, unlike traditional paper-based or spreadsheet-based reserve studies that often lead to lost information and deferred maintenance.
[Interviewer]: So, you’re utilizing new technology to transform the traditional reserve study process, making it more accessible and continuously updated. Is that correct?
[Damian]: Absolutely. Our goal is to leverage technology to make reserve studies more accessible and adaptable. By using our system, associations can extend the useful life of their components, which helps save money in the long run and reduces the need for significant contribution increases. We aim to provide associations with better information, strategies, and confidence, ultimately fostering trust and transparency among community members.
[Interviewer]: In today’s market, with increasing insurance premiums and rising costs, what trends do you see in capital reserve studies? How can associations navigate these challenges and come out better prepared?
[Damian]: That’s a great question. In addition to dealing with inflation and supply chain challenges, one significant trend is the need to address plumbing repairs, which have traditionally been excluded from reserve studies. Associations are now facing this issue, and it’s becoming more common. To navigate these challenges, associations must develop a strategic plan and effectively communicate it to owners. The job of a reserve study goes beyond setting reserve contributions; it involves strategic planning and thinking about ways to extend the useful life of assets. Emphasizing good maintenance practices and leveraging technology to improve strategies and control costs can help associations come out stronger and better prepared.
[Interviewer]: When unit owners or new board directors are presented with a reserve study report, it can be overwhelming. What key areas should they pay attention to, and are there any red flags that may indicate an association is in poor financial shape?
[Damian]: When reviewing a reserve study report, the funding plan is a crucial area to examine. Look for graphs that show cash flow over a 30-year duration. It’s essential to determine whether the graph remains cash flow positive or goes cash flow negative. This can provide an indication of the association’s financial strength. Additionally, understanding the percentage of total assessments going into reserves and comparing it to industry benchmarks is important. Associations with fewer units and inadequate funding may face challenges, as spreading the costs becomes difficult. It’s also essential to consider what’s not included in the reserve study, such as windows, plumbing, or other building envelope issues. These factors can significantly impact capital repairs and potential special assessments.
[Interviewer]: You mentioned funding plans and the importance of understanding percent funded and cash flow methods. Could you explain these terms to readers who may not be familiar?
[Damian]: Percent funded is an indication of an association’s financial strength. It calculates the ratio of total reserve cash (assets) to the liability. This percentage shows how well an association is funded at a given point in time. On the other hand, funding plans determine how an association allocates money for reserves. In Hawaii, there are two options: the cash flow plan and the percent funded plan. The cash flow plan requires having enough cash in the bank each year to cover expenses, while the percent funded plan aims for a 50% funded level, providing a buffer for risk management. While the percent-funded plan offers more protection, it may require a significant increase in contributions, causing challenges for associations. The choice between the two depends on the association’s financial situation and risk tolerance.
[Interviewer]: Hawaii recently passed Act 199, bringing positive changes to the existing laws regarding association budgets and replacement reserves. Could you highlight some of the key changes and their implications?
[Damian]: Act 199 (SB 855) is an important law that brings positive changes to association budgeting and replacement reserves. It requires associations to include a summary with details of the estimated cost of fire safety equipment or installations in their annual budget packets. This is crucial, especially for buildings subject to fire safety ordinances like the five-sprinkler ordinance in Honolulu County. The law also emphasizes the importance of independent reserve study preparation and professional review. Managing agents with industry reserve study designations can now prepare reserve studies, ensuring they don’t have a conflict of interest. Additionally, the law requires additional details in reserve study reports, such as disclosing omitted components and explaining the basis for their omission. It also highlights planned increases in estimated replacement reserve assessments over the 30-year plan.
[Interviewer]: These changes in legislation seem beneficial for associations, especially in terms of fire safety and improving transparency. It’s evident that SmartProperty plays a crucial role in helping associations. If associations want to learn more about SmartProperty as an asset management or capital planning tool, what is the best way for them to get in touch?
[Damian]: We’re there with our customers every step of the way, whether they want to view a demo, undergo a capability review, complete a pilot, or onboard SmartProperty for their association. Visit our website at smartproperty.com or email us at hello@smartproperty.com
