Eight Year Olds

Eight Year Olds (EYOs) is a term 3E Reserves uses to describe a property that never had a reserve study, has inadequate reserve contributions, and an insufficient reserve account balance. EYOs is a general term and it could mean a property aged anywhere from 4 to 18 years. EYOs is the concept that pertains to the lack of reserve contributions from the onset of the property. These properties are usually near the half-way point between major capital expenditures such as roofs, pavement, and HVACs. Plus, the board of directors realizes these expenditures are on the horizon. Therefore, the board of directors becomes proactive and begins to fund the reserve account.

It’s never too early (or too late) to begin reserve contributions. Early reserve contributions result in level and predictable maintenance fees, plus equitable sharing of reserve contributions to fund major capital expenditures. However, many properties have not funded reserves from their onset and fall into the category of EYOs. Surprisingly, EYOs are often in a position to develop their reserve account to adequate levels prior to major capital expenditures. It takes work and a willing board of directors, but the benefits FAR outweigh the costs of developing a reserve account in a shortened period of time.

In order to understand the time dependency of reserve funding, let’s conduct a hypothetical experiment. Imagine your property is ten years old and that the roofs, pavement, and HVACs are scheduled for replacement in ten years as recommended within a reserve study. The cost for this replacement is estimated at $100,000. Therefore an EYO must fund the reserve account up to $100,000 in ten years or $10,000 per year for these expenditures.

Now compare the situation of an EYO to a property that incorporates reserve contributions from its onset. This property would still need $100,000 but it would have 20 years to come up with this funding or $5,000 per year.

Two more comparisons to note in this funding scenario are special assessments and bank loans. Under the special assessment scenario, your property will need $100,000 in one year’s time. The onus is three-fold at minimum. First, this cost is considerable and many unit owners may not have the cash available to pay their share. Second, the cost of these capital improvements is solely on the current unit owners. Past unit owners are unfairly and unjustly free from contributing their share to fund this project as done when reserve contributions are spread over time. Finally, how does the membership view the leadership of the board of directors? It is a certainty that relationships will be strained.

A bank loan is similar to a special assessment in that the expenditure is required immediately. However, unlike a special assessment, a bank loan allows a property to spread the cost over time. In our scenario, we spread this cost over five years. But beware!  A bank loan includes interest which results in higher capital improvement costs than the other three scenarios.

The graph below depicts the funding methods of our hypothetical experiment:

 

Our experiment covers the general concept of these funding scenarios. In reality, the reserve contribution is based on more than three elements, includes interest income, and other factors that make the reserve  funding scenario more intricate. Nonetheless, the point is clear that EYOs are in a precarious position due to the limited time to develop, maintain, and protect the reserve account. Remember – it’s never too late to begin reserve contributions.

As depicted in the graph, an EYO is subjected to higher maintenance fees than a property that began reserve contributions from its onset.  This increase is often difficult for the board of directors and members to comprehend. However, seeing the potential future financial turmoil caused by special assessment and banks should be enough to get EYOs to begin reserve contributions. In fact, the best thing about EYOs is that they have the option to mature, lose the EYO moniker, and begin developing their reserve account.

Leave a Reply


  • Warning: file_exists(): open_basedir restriction in effect. File(/nfs/c03/h02/mnt/55069/domains/3ereserves.com/html//wp-content/uploads/2011/10/6386310_l.jpg/3.jpg) is not within the allowed path(s): (/nfs:/tmp:/usr/local:/etc/apache2/gs-bin) in /nfs/c03/h02/mnt/55069/domains/3ereserves.com/html/wp-content/plugins/dynamic-content-gallery-plugin/includes/dfcg-gallery-constructors.php on line 538

    Warning: file_exists(): open_basedir restriction in effect. File(/nfs/c03/h02/mnt/55069/domains/3ereserves.com/html//wp-content/uploads/2011/10/6386310_l.jpg/3.jpg) is not within the allowed path(s): (/nfs:/tmp:/usr/local:/etc/apache2/gs-bin) in /nfs/c03/h02/mnt/55069/domains/3ereserves.com/html/wp-content/plugins/dynamic-content-gallery-plugin/includes/dfcg-gallery-constructors.php on line 538

    Warning: file_exists(): open_basedir restriction in effect. File(/nfs/c03/h02/mnt/55069/domains/3ereserves.com/html//wp-content/uploads/2011/10/6386310_l.jpg/3.jpg) is not within the allowed path(s): (/nfs:/tmp:/usr/local:/etc/apache2/gs-bin) in /nfs/c03/h02/mnt/55069/domains/3ereserves.com/html/wp-content/plugins/dynamic-content-gallery-plugin/includes/dfcg-gallery-constructors.php on line 538

    Warning: file_exists(): open_basedir restriction in effect. File(/nfs/c03/h02/mnt/55069/domains/3ereserves.com/html//wp-content/uploads/2011/10/6386310_l.jpg/3.jpg) is not within the allowed path(s): (/nfs:/tmp:/usr/local:/etc/apache2/gs-bin) in /nfs/c03/h02/mnt/55069/domains/3ereserves.com/html/wp-content/plugins/dynamic-content-gallery-plugin/includes/dfcg-gallery-constructors.php on line 538

    Good Information

    This is the second time I am reading this book within the last two years. The book intends to indoctrinate… [more]

    Good Information Good Information

    Few Updates of Recent Activity

    Published article in CAI-WI quarterly magazine on the Core Items of an Operating Budget. Also, conducted… [more]

    Few Updates of Recent Activity Few Updates of Recent Activity

    Upcoming Trade Show…

    3E Reserves will be at ACTHA's North Trade Show on Saturday, October 9, 2010, from 8am - 1pm at the Mariott… [more]

    Upcoming Trade Show… Upcoming Trade Show...

    ACTHA Certified

    Recipient of ATCHA's Learn and Lead Certification, which is "the best way to increase your knowledge… [more]

    ACTHA Certified ACTHA Certified