Hawthorne Resident’s Cooperative Association

Budget Committee

WELCOME

2020 Operating and Capital/Reserve Budget Overview & Discussion

10-14-19

1

Let’s Begin

• Housekeeping

• Handouts For Today-Answers to Last Meeting’s Questions

• On The Wall

• Recap Operating Budget Line Items

• Recap of Add On Line Items

• Recap of Costs of Goods & Services

• Any Questions Before We Start?

2

On The Wall

• On the wall you will see various sheets with major categories assigned to a page

– Capital/Reserve (Meeting #2)

– Revenue (Meeting #3)

– Proprietary Lease – Governs Services Provided

– Level Of Service- What is Community Expectation-(Are we meeting expectation and at what cost?)

– 2021

– Need More Information

3

4

Capital Budget

• Capital budgeting is the process to evaluate potential major projects or investments.

• Construction of infrastructure, water and sewer

infrastructure, building major repairs and remodels are examples of projects that would require capital budgeting before they are approved or rejected.

• As part of capital budgeting, we assess the requirements of the proprietary lease look at the reserve study and any prospective projects that may need addressing sooner rather than later.

5

Hawthorne– Infrastructure- Buildings

• INFRASTRUCTURE - The acquisition cost of permanent improvements, other than buildings, which add value to the land. These improvements consist of capital expenditures such as roads, bridges, streets, sidewalks, curbs, gutters, drainage systems, and outdoor lighting systems.

• BUILDINGS - defined as a structure that: – Is permanently attached to the land – Has a roof – Is partially or completely enclosed by walls – Is not intended to be transportable or moveable

6

Operating vs. Capital

• Operating expenses are expenses incurred during the course of regular business, such as general and administrative expenses, research and development, and the cost of goods sold.

• Capital expenditure is incurred when a business spends money, uses collateral or takes on debt to either buy a new asset or add to the value of an existing asset with the expectation of receiving benefits for longer than a single tax year.

• Essentially, a capital expenditure represents an investment in the business.

• Capital expenses are recorded as assets on a company's balance sheet rather than as expenses on the income statement. The asset is then depreciated over the total life of the asset, with a period depreciation expense charged to the company's income statement, normally monthly. Accumulated depreciation is recorded on the company's balance sheet as the summation of all depreciation expenses, and it reduces the value of the asset over the life of that asset.

7

Annual Budget - Reserves

• Reserve funds are central to the fiduciary duty of the corporation to:

– Identify repair and replacement obligations

– Determine the costs and timing for replacement

– Determine the availability of necessary (reserve) cash resources to accomplish this

8

Annual Budget - Reserves

• Reserve funds and any interest accruing thereon shall remain in the reserve account or accounts,

– and shall be used only for authorized reserve expenditures

– unless their use for other purposes is approved in advance by a vote of the majority of the voting interests, voting in person or by limited proxy

– at a duly called meeting of the association.

9

10

Reserves

Amount to be reserved must be computed using a formula based upon estimated remaining useful life and estimated replacement cost or deferred maintenance expense of each reserve item

Corporation may adjust replacement reserve assessment annually to take into account any changes in estimates or extensions of useful life of a reserve item

11

Reserves

Funding for

HAWTHORNE FUND A (Currently $8.00 per month)

• Roof Replacement

• Building Painting

• Pavement Resurfacing

HAWTHORNE FUND B (Currently $27.00 per month)

• Any Other Item that has a deferred maintenance expense of replacement cost that Exceeds $10,000

12

Reserve Components

Roof

Building Paint

Buildings

Pavement Resurfacing

Air Conditioning Equipment

Clubhouse

Clubhouse Contents

Pool

Concrete Restoration

Plumbing

13

Reserve Components

Electrical & Life safety Systems

Ponds & storm Water Drainage Systems

Fences & Walls

Balconies & Railings

Tennis Courts/Bocce/Softball

Street Lights

Street Curbs & Sidewalks

Landscaping

Irrigation Systems

14

Reserve Components

Gate & Access Control Systems

Docks, Boat Slips, Boat Ramps & Seawalls

Lift Stations

Utility & Storage Sheds

Windows and Doors

15

Reserve Components

Boards May Add a Line for Contingency for Capital Expenditures and Deferred Maintenance Possible: Add Allocations for Items that are NOT in the Reserve Study: IT/ Computer Systems (Software &hardware)/Trees Boards of Directors are required to propose a budget with “fully funded” reserves. (CY 2019 Amount would have been $40.22 vs. $35.00 Total Fund A & B Not-fully funded) Owners may vote to waive or reduce amounts reserved (Risk involved if item is not properly maintained)

16

17

Reserve Study

• A reserve study is a long-term capital budget planning tool which :

– identifies the current status of the reserve fund

– and a stable and equitable funding plan to offset ongoing deterioration,

– resulting in sufficient funds when those anticipated major common area expenditures actually occur.

18

Reserve Study

• The current reserve study was done on July 28, 2017 By Florida Reserve Study and Appraisal Inc.

• The reserve study consists of two parts: – the physical analysis and

– the financial analysis

• The analysis provides estimates through the year 2048.

• As the document is 112 pages we have placed this on the website for viewing.

19

Reserve Study

• Physical Analysis

– Identifies the item and its condition, useful life and estimated repair or replacement cost

• Financial Analysis

– Reviews income, expenses, assets, liabilities and existing reserve fund

Good business practice is to review the reserve study every 2-3 years

20

Useful Life

• The useful life of an asset is an accounting estimate of the number of years it is likely to remain in service for the purpose of cost-effective revenue generation.

• The Internal Revenue Service (IRS) employs useful life estimates to determine the amount of time during which an asset can be depreciated.

• There are a variety of factors that can affect useful life estimates, including usage patterns, the age of the asset at the time of purchase and technological advances.

21

Reserve Study Calculation

• Either Separate Analysis for Each Asset

Or

• Pooled Analysis of two or more of the required assets which is calculated using the cash flow method (pooling) Florida Administrative Code 61-B-22.005 and Florida Statutes Section 718.112 (2)(f)

• We Use Pooled Method

22

23

Reserve Study

• We have put together the list from the Reserve Study (Tab #10) that identifies items related to:

• 2018

• 2019

• 2020

24

Reserve Study

• Our review also identifies certain areas that were not included in the Study that should be considered to be added as an Allocation

• Arborist

• Trees

• Stumps

• IT

• Computer Infrastructure

25

26

2020 Capital/Reserves

• Items Identified for 2020 are found on Tab #11

• Handout from Last Week on Safety Assessment also provides some insights as to areas in need of attention.

27

What We Accomplished Today

• Recap

• Any Questions

• Next Steps

• Meeting #3

28