Are you a board member of a condo, townhome or HOA community association? Or perhaps you are a homeowner serving on a capital improvements committee? One of the most important questions to ask is when to replace a capital item such as a hot water tank or a boiler heating system.
If your building doesn’t have a common hot water tank or a heating system, this article still applies to other types of capital equipment and HVAC systems. And even if you have a reserve study for your condo association, you should still have a basic understanding of the major mechanical systems in your association especially if you are serving on the board.
If you have a management company, they should have the answers to each of these questions readily available. If not, you might want to consider switching to another management company as this is one of the basic functions of a management company which is to assist the board of directors in the proactive replacement of capital equipment.
Here are the steps you should employ to determine when you should replace this system:
- Determine the age of the system. The first question to ask is do you know the age of your system? Most hot water heating systems last approximately 15 years. Some only last 10 years and some can extend to 20 years if you are lucky. The manufactured date and/or install date of the system is normally on a sign that is riveted or fastened to the system. You might have toremove a grill or cover to access this information.
- Check the condition of the system. A visual check of the system should let you know if there are current leaks or if there is rust present on the system especially towards the bottom of the tank area.
- Check your capital plan and reserves. Does your association have a capital plan? Does your association have a reserve study? If you have a reserve study, check to see when it was completed. It may not have relevant information if it is over 5 years old. If you don’t have a capital plan or a reserve study, then you should consider having a capital plan or reserve study put together for the association.
- Get a quote for full replacement. If your system is 10 years old or greater, you should get a full replacement quote. If you have a current reserve study, this information should be on there. And even in that case, you might consider getting a quote from a qualified vendor. There are different types of hot water tank systems and the system included in the reserve study has general costs but not based on actual costs from local vendors
Before getting a quote, determine what is the best system for your type of association. There are different types of systems and configurations. Get a few opinions and determine which system and configuration is best for your association. - Fund the replacement. If the system is nearing 10 years old or older and especially if it is showing some wear and tear like rust and leaks, it is time to start planning the full replacement. Options to fund the replacement include: paying directly from the reserves, paying half from reserves and half from a special assessment or even a by obtaining a bank loan and special assessment if the system is a bigger more costly one. In any case, make sure you leave a sufficient amount in the reserves for other upcoming capital projects and in order to meet FHA and other financial guidelines.
- Replace the system. This is the million-dollar question. When exactly should you replace the system? This depends on the level of proactiveness of the board of directors. If you have a current reserve study, this report would specify what year to replace the system and in a perfect world, the association would follow exactly what the report says. Unfortunately, in many cases, the association doesn’t follow the reserve study recommendations and the report is no longer valid since the reserves are not in line with the report recommendations and the capital items are not replaced in the manner specified by the report.
As a result, I will describe an alternative scenario which is one where the association does not have a reserve study or has an expired report. In this case, the board properly plans ahead by funding the reserves through assessments or special assessments so that when the time comes, the funds are available for the full replacement.
And the board understands that the system could have lasted another year or several more years but knows that it is much better to replace the system proactively rather than waiting for the system to fail and cause unnecessary stress and headaches to the board and homeowners. The other reason that this is the best-case scenario is that it typically will cost less to proactively bid out the system and replace it rather than wait for it to fail and then replace it on an emergency basis that usually ends up costing the association 10% to 50% more by doing so.
SUMMARY
How proactive do you wish to run your association? Do you prefer to avoid unnecessary headaches and stress? Do you wish to avoid emergencies that cost the association thousands of dollars that could have been avoided? These are the questions you need to ask yourself and your fellow board of directors.