By Ronn Williamson
Vice Chair for Reserve and Replacement Studies
As published in The View, November 2023:
When the new budget is released by the HOA board in November, you will notice a line item for replacement fund expenditures. It is a big number – likely more than $3.5 million to be spent in 2024. Think of the replacement fund as part of the community’s long-term maintenance plan to preserve and enhance property values.
The operating budget provides money for the day-to-day maintenance of common areas, including the golf courses. The replacement fund was created for expected long-term maintenance needs. It funds major repairs or replacement projects tracked in a “components list” for capital assets needing replacement during the next 30 years. This replacement fund components list is found in the reserve study report created annually and made available on the SCSH website in a folder titled “HOA Finances & Planning.”
The component list is the roadmap for maintaining our community assets to ensure the community remains an attractive place to live. There are 858 components in the current list to be funded for eventual replacement in the next 30 years. Some components, such as riding mowers or fitness center exercise equipment, may be replaced several times over 30 years; while others, such as golf course irrigation pumps or a clubhouse roof, may be replaced once.
Replacement timing starts with assigning a “useful life” for each component because everything ages differently, and we want to replace things before their age is a detriment to our community. (The Merriam-Webster dictionary defines asset useful life as “the amount of time during which something is in good enough condition to be used.”) Some people believe that, to be good fiscal agents, we should use things until they fail. But that generally results in unhappy residents waiting for components in poor condition to be replaced.
Our written replacement fund policy directs that “all common areas should be maintained in a minimum rating of ‘good’ condition.” For example, whether a component is assigned a 15-year useful life or five years, once it reaches “zero” years of remaining useful life, it may no longer be in good condition. This is when we evaluate it for replacement. We currently expect 88 components worth more than $3.5 million to be at “zero” remaining useful life during 2024. This is the largest number of components targeted for replacement in a single year so far at SCSH, but it is a natural consequence of our community getting older.
As 2024 begins, our maintenance managers will create a monthly replacement forecast to achieve minimal community disruption, consider seasonal issues, and to allow an orderly process for approval of expenditures of Board Requests for Action (BAFs). With each BAF, the component condition is evaluated by staff and designated committees. Competitive quotes are obtained if replacement is advisable; and work plans are proposed. The FAC provides a final BAF financial review and recommends that the Board approve the replacement action.
In the final analysis, there are many components to monitor. Critical judgment is required to assess the condition of each component and act before it negatively impacts our common areas and amenities. Differences of opinion can occur on timing and acceptable cost, but the result of our collective efforts should be that replacement funds are used to keep our community attractive to residents and prospective buyers in the future – just as attractive as when we each decided to purchase here.
Contact the author at finance@scshca.com.