What’s So Special About 20 Years?

Year twenty is a pivotal milestone in the life-cycle of every building and a transitional point in the life of almost every common interest community, whether it is a traditional planned development of single-family homes or condominium that contains attached housing units.

The significance of the 20-year mark lies in the fact that at around 20 years of age two things occur more or less simultaneously. The first is that almost all buildings have reached the point where major expenditures will be required to pay for modernization or replacement of various components of the building. Significant expenditures may be an immediate concern, but even if they aren’t, it is likely that within 5 to 10 years the Association will be faced with major replacement reserve expenditures.

The second is that when you conduct a reserve study that projects 30 years into the future, at a point when a homeowner association is 20 years old, the reserve planning horizon now captures a point in the future when the facility, which is the subject of the study, will be 50 years old….and at 50 years of age there are almost no depreciating building assets that have not reached the end of their expected useful life.

In those states where condominiums and planned developments are required by law to conduct a reserve study that covers a period of 30 years, the reserve study that you conduct at 20 years of age will capture those expenses that may only occur once every 45 to 50 years. In the reserve planning business these long-lived components are referred to as “legacy systems.” Legacy systems are those components that were placed into service when the building was originally constructed and have never been replaced or significantly updated since they were placed into service.

Planned communities that may not be responsible for maintaining buildings per se, may also be faced with the issue of reserving funds to pay for replacement of legacy systems if the Association is responsible for improvements such as roads, utility systems and other infrastructure-related elements of the community.

A reserve study that includes funding for the replacement or modernization of legacy systems will typically result in a significantly greater amount of money that is projected to be spent over the period of time covered by the reserve analysis. This implied or forward spending obligation represents a form of liability to the degree future spending is not offset by reserves that have already been accumulated. Under the best of circumstances, an Association that has reached 20 years of age is perhaps 10 years away from the point where major expenditures will be required. Under the worst of circumstances, major reserve spending may be an immediate concern.

In addition to accumulating the money that is required to pay for these expenses, the 20-year milestone also represents the point at which the planning process becomes more intensified, if it hasn’t already. In many cases 20 years is the first significant reality check for many homeowner associations.

Those that have treated the reserve planning/funding process in a casual manner may find they have run out of time. Those that have never conducted a reserve study or have ignored the need to update and “work” the plan over the years may find it almost impossible to dig their way out of the financial hole that they have created without borrowing or levying special assessments.

As buyers become more knowledgeable and sophisticated in their ability to analyze homeowner association finances these aging communities are likely to become less attractive investment targets. Homeowner associations that reach the tipping point with insufficient reserves are likely to find that the homes within the community are harder to sell and when they do sell they may not command top of the market prices.

In the next installment of this series we will examine some of the solutions that older homeowner associations are using to resolve the issue of under-funded reserves and why borrowing to offset a lack of replacement reserves is almost always a bad idea.

New Online Reserve Study Update Service

With the launch of CRC’s new website clients will be able to submit the information required to update their reserve studies via the Reserve Study Update Form submission page. The new site also includes an online payment processing platform that may be used to pay for the annual reserve study update.

If you are a current reserve study client of CRC the payment terms of your update agreement will state what the cost of the update is and whether payment is due in advance or after delivery of the updated reserve study. All clients who choose to pay online will receive a 3% discount on all update fees through the end of 2019.

If you are not a current client of CRC, but you have a previous reserve study that was prepared by CRC or another reserve study provider, you may use the Reserve Study Update Form to submit the update information and request a quote for the cost of updating your reserve study.

To request a quote for updating a reserve study prepared by a different provider you must upload a copy of the reserve study that you wish to have updated at the time you submit the form

The upload field allows you to drag and drop a PDF, Excel® or MS Word® document into the upload field and submit it along with the form. CRC will review the reserve study document that is submitted with the form submission and will provide you with a quote via email within 24 hours.

Closing in on 2020…

As we close in on the year 2020 it is becoming more and more apparent that the tipping point we began to warn people about back in 2009-2010 has indeed arrived, just as we predicted it would. The tipping point we were referring to back in 2010 is the year 2020, at which time the overwhelming majority of homes in the United States will be at least 20 years of age.

CRC’s principles first started to sound the alarm after we were invited to submit a proposal to be a presenter at the Community Associations Institute (CAI) National Conference. Since we had just spent the last year researching the U.S. housing market in the wake of the collapse of the sub prime mortgage market we thought it would be a perfect opportunity to introduce the world to the phenomenon we had begun referring to as, “The Tipping Point.”

The primary source document for our research was the 2007 American Housing Survey prepared by the U.S. Census Bureau with funding from the U.S. Department of Housing and Urban Development (HUD). This New York City phone book sized document was supplemented with information obtained from the CAI’s Annual Statistical Review published by the Foundation for Community Association Research as well as information obtained from the National Association of Realtors (NAR) and the National Association of Home Builders (NAHB).

To summarize, what the data told us was that by the end of 2008 new housing starts in the U.S. had dropped precipitously from the 2006 recent high-water mark of 1.98M units, which was the peak year for new home starts since 1973 and the third highest in 40 years. Not only had the number of new housing starts dropped from almost 2M units in 2006 to less than 1.2M in 2008, the decline would continue for another 3 years before reaching the bottom in 2011 when new housing starts in the U.S. were only 585K units.

By the end of 2009 new home construction had plummeted to a level that was barely one-third the number of new homes that had been constructed in 2006. This dramatic decrease in new homes starts combined with the fact that by 2010 approximately 65% of the existing homes in the U.S. would be at least 10 years old, meant that within 10 years the percentage of homes in the U.S. that would be at least 20 years old was likely to be in the range of 70%-75%, depending on how quickly and to what degree the rate of new home construction began to increase.

As it turns out, new home construction has never come close to the 2007 level of 1.5M units and in fact through the end of 2018 new housing starts have yet to exceed 1.2M units in any year since 2007. This means that the rate at which new homes are being added to the U.S. housing inventory is only two-thirds the rate of construction that we experienced during the peak production years of 2004-2006.

In the next installment we will examine why it is that 20 years is such an important milestone in the life-cycle of a home and why it is that we continue to argue that The Tipping Point we predicted back in 2010 has in fact arrived…