Boards need to understand how inflation affects their reserve project in order to be able to show homeowners why the board needs to raise HOA dues based on reserve projects. The Next Step Solutions Reserve Study can respond to board request for difference interest rate scenarios. Inflation rates can range from 0% to 10% inflation. The reserve study provided for each HOA includes 2 interest rate analyses.
The first Report will be completed at 0% inflation to provide the board a status on where the % funding is as of the start of the fiscal year at current prices listed in the study. A second study will be completed at whatever inflation rate the board would like to consider. If no rate of inflation is chosen, 3% inflation will be used.
Below is the 2nd Executive Summary provided in the HOA reserve study. This gives you an excellent idea how inflation will affect your reserve savings. As everyone knows, nothing goes down in price. Many times when you replace an item in the reserve study, you notice the price may be quite different than what is displayed in the reserve study. That is because the "Future Replacement Costs" may not have been updated in several years. It is a good idea for the board to call out a vendor to have them do an updated costs analysis if one has not been completed on a major project in years. That way you can notify your reserve company to update the "Future Replacement Costs" for the project.
Note how the "Per Unit Monthly" dues changed from $173.63 to $236.34. This is because all capital costs in the reserve study have been increased each year by 3% for each year of the "Useful Life" that has already been expended.
Below is an example taken from the above summary. The asphalt resurface was last completed for $22,500. It has 17 years left in the "Remaining Life". Therefore, 17 years from now, that $22,500 project will now costs $37,189. If the HOA has not saved that amount of money, this will come as quite a shock to homeowners. It is important to include inflation calculations in your reserve savings plan. Boards will need to increase HOA dues periodically to address inflation.
You will also note that the costs of projects with 0 remaining life are not affected by inflation. This is because the expenses are expected to happen this year. It assumes the expense that is listed in the "Actual Expense" column is correct. This is how inflation affects your reserve study.