OUR BUSINESS IS RESERVE STUDIES

Established Condominium Reserve Study

Whenever a common component fails and needs to be repaired or replaced, the cost of that repair/replacement is paid for by unit owners through an established repair and maintenance capital reserve account, borrowing funds from an established line of credit or via special assessment levied on unit owners.

Each year board members are required to ratify an operating budget that should include a capital contribution for any predicted repair or maintenance costs associated with the common components in a property.

Associations should have an established reserve account to ensure that planned repairs and maintenance costs are paid for without billing unit owners through a special assessment.

Reserve accounts are established to ensure that unit owners are not financially burdened by special assessments and to ensure that the financial budgeting necessary to ensure the financial healthy and habitability of a condo or co-op property is in place.

The Timeline

• Proposal Request
• Pre-Inspection Board Conference
• Online Site Questionnaire Completion
• On-site Inspection
• Draft Reserve Study Delivery Conference
• Final Report Issued
• Yearly Update Prior to Budget Creation

UTILIZATION

A Reserve Study report is important to ensure component repair and replacement funding. It is also utilized to provide answers to questions asked on lender questionnaires and reduce board liability

What is a Reserve Study and Why is It Important?

A reserve study is a vital capital planning tool for HOAs and condominium associations that provides directional guidance and an in-depth analysis of community assets. The initial reserve study requires an onsite inspection and thorough examination of the reserve fund status to establish a prioritized schedule of capital improvement projects and a reserve funding plan to pay for them over the next 30-years. Less rigorous or meticulous reserve study updates — conducted every 3-to-5-years — are also important for helping associations to maintain an accurate forecast of future expenditures and to ensure adequate reserve funds.

Without a reserve study on hand, an HOA is flying blind into its future. To set its course, the HOA has a fiduciary responsibility to hire an independent reserve study company to do this important work and to leave behind a well documented plan that benefits current and future boards. Property managers come and go; board members frequently change, and the existing reserve study is there to help new decision makers understand the logic or reasoning behind earlier choices. A professional reserve study company will be available to discuss its work, the methodology used, and considerations that went into the study years after it was conducted. Additionally, reserve study specialists can support HOA boards by providing periodic updates to the original reserve study, ensuring the association remains on track.

For an association, having a reserve study is like having an investment strategy: you set aside funds today to cover future expenses. Success is dependent on understanding long-term expenditures and your ability to fund them through reserves.

Why are Reserve Studies Important?

Reserve studies are important because they help property managers and HOA boards see the big picture as it relates to property maintenance and financials. The upkeep of your association’s common elements, the pool you swim laps in every morning and the sidewalks you stroll every night, for example, is oftentimes, driven by the reserve study recommendations.

One of the primary responsibilities of the board of directors is to protect, maintain, and enhance the assets of the community association they serve. To accomplish this objective, associations must develop multi-year plans that help them understand their long-term budget needs and, at the same time, anticipate and responsibly prepare for the timely repair and replacement of common area components such as roofs, roads, mechanical equipment, and other portions of the community’s common elements.

Generally, a reserve study includes two important parts:

• A physical analysis. This portion includes a component inventory, a physical condition assessment of the common areas the HOA is responsible for maintaining and repairing, and life and valuation estimates. It also includes estimates of repair and/or replacement costs.
• A financial analysis. This portion of the reserve study identifies the status of the association’s reserve fund and presents an equitable funding plan to offset ongoing deterioration by ensuring the availability of sufficient funds to offset anticipated major common area expenditures as they occur. Complete financial health – revenue, expenses and reserve fund balance are all under the microscope.

How to Approach a Reserve Study

Look for a reserve study company with multi-disciplined engineers who have industry accreditation (CAI’s Reserve Specialist Designation and/or APRA’s Professional Reserve Analyst designation). HOA members should expect comprehensive plans that clearly explain the condition of their community association’s common elements and a funding plan to pay for future replacements.

Every study, according to the Community Associations Institute, should include at least seven items to ensure your community gets the directional guidance it needs for prioritizing capital projects and to maintain financial stability. CAI’s widely accepted standards help ensure every reserve study follows a similar methodology for providing key findings and recommendations. That’s the cake. But to help you truly understand a reserve study, you’ll want the frosting too. You’ll want a detailed report that utilizes tables, graphs, pictures, diagrams, spreadsheets and explanatory graphics, all of which make the report easy to understand. These items are important pieces of a reserve study and should not be considered as extras.

CAI’s List of Contents to be Included in a Reserve Study

1. A summary of the association’s number of units, physical description and reserve fund financial condition.
2. A projection of reserve starting balance, recommended reserve contributions, projected reserve expenses, and projected ending reserve fund balance for a minimum of 20 years.
3. A tabular listing of the component inventory, component quantity or identifying descriptions, useful life, remaining useful life and current replacement cost.
4. A description of methods and objectives utilized in computing the Fund Status and development of the Funding Plan.
5. Source(s) utilized to obtain component repair or replacement cost estimates.
6. A description of the level of service by which the reserve study was prepared.
7. Fiscal year for which the reserve study is prepared.

Reserve Studies For The First Time Buyer

It is budget time for many associations and boards are updating their reserve studies. Many others have never had a professional reserve study and are now considering investing in their first one. Questions may arise such as, “What is the purpose of a reserve study?”, “What are the benefits to the Association?”, or “How do we go about having a reserve study conducted for our Association?”

CondominiumsFirst, it’s important to understand what a professional reserve study is and how an Association benefits from having one. A reserve study is an independent long-term analysis (generally 30 years) of Association property that determines the amount of funds required to repair or replace the common elements of an association as they wear out over the life of the property. Examples of common elements include exterior walls, roofs, paving, elevators and swimming pools.

A professional reserve study is a key financial planning tool that helps the Board fulfill its fiduciary responsibility to maintain the common property of the Association.

The American Institute of Certified Public Accountants (AICPA), in its Audit and Accounting Guide, Audits of Common Interest Realty Associations, states that the Association’s “primary duties are to maintain and preserve the common property.” The professional reserve study becomes the blueprint for the ongoing financial well-being of the Association that current and future boards rely upon. Legislation among the states has increased dramatically in recent years, clearly defining the fiduciary obligations of Boards and Managers, and funding of reserves. Among the states with legislation regarding reserves and reserve studies are California, Florida, Illinois, Michigan, Nevada and Virginia.

The trend is certainly toward more stringent requirements. The purpose of these laws and the AICPA Audit Guide is to protect the investment of current and future Association homeowners.

Key Components Of A Reserve Study

Determining an appropriate amount to reserve is dependent upon the amount of common property and that property’s condition. A reserve study conducted by a qualified firm will include a complete inventory of all common elements subject to repair or replacement, the useful lives of the common elements and, more important, their remaining useful lives, a determination of future replacement costs by element and by year, and relatively stable reserve budget recommendations for at least each of the next 30 years.

Some firms provide more insight by documenting the current condition of each element. Additionally, the Reserve Study Consultant can analyze maintenance problems and use his or her expertise to provide engineering recommendations that will extend the lives of the common elements, thus saving the Association money.

Why Should We Hire A Consultant?

Licensed Engineers with experience in performing reserve studies possess the best qualifications. Their experiential knowledge in construction and building systems is the foundation for providing you with an objective, independent opinion for capital repairs and replacements over the life of your Association.

Element of TimeAn accurate reserve study ensures that adequate reserves for replacement will be available at any point in time, especially during those critical periods of heavy capital expenditures. Properly funded reserves also treats current and future homeowners fairly. Overfunding of reserves suggests that current homeowners are paying more than their fair share. Reserving too little results in a deficit position or insufficient funds to cover the replacement of major items like a boiler or roof. The Board is then left with the unpleasant task of special assessing the homeowners or borrowing. With a professional reserve study, claims of financial mismanagement by current or future owners are greatly reduced because the Board exercised sound business judgment and planned responsibly with expert advice.

Directors and Officers liability insurance helps protect board members from personal liability. However, litigation can still be very costly, time consuming and stressful. It is not uncommon for litigious issues to arise years after one’s tenure as a board member is concluded. An independent reserve study also satisfies the requirements of the AICPA Audit Guide. The audit guide states that disclosures should be made regarding the determination and adequacy of reserves. Additionally, the professional reserve study serves as the foundation for meeting state statutes that call for adequate or reasonable reserves.

The marketability of homes is also strengthened by showing prospective buyers and their lenders that the Association is properly managed. Today, more than ever, buyers and their lenders are more closely scrutinizing the Association’s budget, current reserves, and long-range projected expenses. Many banks also require independent reserve studies as a requirement for approving mortgages.

What About Updating The Study?

It’s important to update a reserve study every few years. The reserve study is a financial snapshot of the Association. Periodic updates account for extended or diminished remaining lives of common elements due to factors such as maintenance practices, weather conditions, actual changes in inflation factors that affect local market rates for materials and labor, changes in fund interest earned, and changes in Association property due to additions and deletions.

The updated reserve study will also help maintain and confirm the financial well-being of the Association well into the future. This ensures that the Association will have an accurate, perpetual financial planning tool that the current and future Boards can rely upon with confidence.

How Do We Select A Qualified Reserve Study Firm?

Selecting the right Reserve Study Consultant requires several considerations to ensure you obtain the service that best fits with the long-term goals and objectives of your Association.

1. Develop a List of Potential Consultants – Contact Trade Associations (such as Community Associations Institute) for a list of qualified Engineers. Ask other Consultants such as your Lawyer or Accountant. While they are not involved in these decisions, they will likely have other clients that have hired a Reserve Study Consultant.
2. Obtain Written Proposals – Make sure the fee quoted is a total fee. Ask the Consultant to spell out the nature and estimated cost of expenses if the proposal quotes a flat fee plus expenses. Also, obtain an upper limit on the cost so the total cost will not exceed the Association’s budget.
3. Review Each Firm’s Qualification – Focus on whether the firm has the necessary experience, specializes exclusively in reserve studies for Associations, and is a member of CAI and the American Association of Cost Engineers (AACE).
4. Get References – Many people believe that vendors “stack the deck” with favorable references. A small amount of probing on your part will provide invaluable insight. Ask references open-ended questions like, “Why did you select the firm you chose?” and “What did you like best and least about the firm?” While the reference might be pleased with the service performed, it may be for reasons that are unimportant to you.

Professional reserve studies are a key component in helping current and future Association Boards meet their fiduciary responsibility and comply with state statutes and the AICPA Audit Guide. Additionally, reserve studies minimize monthly homeowner contributions while minimizing the risk of special assessments, reducing claims of Board mismanagement, and providing a valuable selling tool for prospective buyers and their lenders.

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Why Have a Professional Reserve Study?

Why Have a Professional Reserve Study?

Every community association has three functions – to serve as a business, a government and a community. Community associations are generally nonprofit corporations, functioning in many ways as businesses with revenues (association dues, clubhouse rentals, revenues from golf courses or restaurants, etc.) and expenses.

As a business, the board needs a business plan for the maintenance of the Association assets. Which assets or parts thereof (i.e. partial pavement replacements, phasing roofing replacements) will require repair or replacement, when, and at what cost? These are the most important questions one must ask in determining a forecast of future capital projects. When managing the contributions (assessments) of hundreds of homeowners, it is essential to provide as accurate a forecast as possible.

As a result of conducting hundreds, if not thousands of reserve studies, professional firms have the expertise to apply engineering success stories from other associations to determine the most reasonable reserve budget that is consistent with the board’s objectives. The benefit to homeowners is that present and future owners are treated fairly and equitably. As an example, special assessments are typically conducted because those who lived in the community previously did not pay their fair share and as a result, current owners have to pay extra.

A professional reserve study is a continuous ‘blueprint’ for the future. Board members frequently change. While future board members may not understand the logic or reasoning behind prior decisions that were based on internally conducted reserve studies because the author(s) are no longer around, a professional reserve study firm will be available to discuss their reserve study, the methodology used, and considerations that went into the analysis years after it was conducted. Also, the independent reserve study provider can help future boards with periodic updates to the original reserve study to ensure the association remains on track.

Consistency is another benefit of having a professional reserve study conducted. If more than one individual participates in the development of the reserve study, how can the owners be ensured a level of consistency among the individuals in completing the technical aspects of the report? And when periodically updated, will the same individuals be available to make changes to the original reserve study?

Liability and support of internally developed reserve studies are often difficult challenges. Does the Association have errors and omissions (E & O) insurance for the in-house reserve study expert or only insurance for its directors? Is the “in-house expert” covered by the association’s E & O insurance policy? Will the expert be willing to stand behind his or her conclusions to other homeowners, buyers, and lenders?

Turnaround time is another factoring question. Can an internally produced reserve study be conducted in a timely manner? Quite often, timelines are not met because information from third parties takes longer to obtain than expected, some of those participating in the assignment can get distracted with personal business (don’t forget, board members aren’t paid for these activities!) and completing the reserve study could drag out for a year or more. Just about that time, elections take place and the board turns over, and the association is back at square one – no long-range plan.

Boards routinely seek outside expert advice concerning audits, production of financial statements, and legal advice. Homeowners will have more confidence in their board because they sought outside expert advice for a reserve study as well as other professional services.

Another advantage is knowing that their reserve study was conducted within the national guidelines of the Association of Professional Reserve Analysts (APRA) and Community Associations Institute (CAI). The real value to owners is knowing that the reserve study was conducted independently of any personal agendas, either real or perceived.

The second part of the business plan is knowing how to obtain funds to pay for capital projects when it is necessary. An independent, professional reserve study will not only identify future costs but should determine a minimum and stable level of funding to accommodate these future capital projects. Thus, homeowners can be reassured that there is minimal risk of special assessments.

Quite often, the independent reserve study provider can make recommendations that prolong or extend the life of common elements and save homeowners significant dollars over the long term. For example, many times associations run into problems with leaking foundation walls. Bringing in excavators and obtaining two or more bids to correct the problems can be a far more expensive solution as opposed to seeking impartial advice from an independent reserve study provider offering alternative and often less costly solutions to a particular problem.

Financial ReviewAn independent professional reserve study is a great marketing tool for prospective buyers and their lenders. The independent reserve study shows that the association is managed with expert advice, which adds value to the property. Prospective buyers, particularly second-time buyers, are more shrewd and likely to ask not only how much is in reserves, but what is the money in reserves to be used for?

As a governance, the board has a fiduciary responsibility to the owners not dissimilar from the responsibility corporate board members have to shareholders. They must, to the best of their ability, strengthen the value of the organization. The reserve study must comply with the AICPA (American Institute of Certified Public Accountants) accounting guidelines for financial reporting and state reporting requirements, which change on an annual basis in some states.

A professional reserve study also reduces claims of financial mismanagement because the board sought out the advice of an independent reserve study expert. Demonstrating sound fiscal management to the owners with a professional reserve study provides owners with a high comfort level that their investment in their property is being managed properly.

Last, having an independent professional reserve study is simply good business sense.

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