A Reserve Study is a budget-planning tool used by Homeowners Associations that identifies the current status of the Reserve Fund and establishes a stable and equitable funding plan to offset anticipated common-area expenditures. They contain an evaluation of property condition and serve as an indispensable tool in projecting costs and managing Reserve accounts.
A quality Reserve Study performed by a Professional Engineer is the best way to continue planning for future repairs and improvements.
A Reserve plan will outline where your Association currently stands, and where to go from here. By providing your Association with a comprehensive inventory of all common elements and an in-depth analysis to dictate your community’s maintenance standards, the final report will greatly assist your Association in reaching financial stability.
A Reserve Study consists of two elements: physical analysis (condition assessment) and financial analysis (fund status and funding plan). The physical analysis produces a detailed Reserve component list for your community. This component list will inventory the Association’s common elements and the remaining useful life of each one. The financial analysis measures the status of your Reserve Fund in both actual monetary figures and the percent funded. The percent funded is particularly important as it will give you a goal to work towards relative to your Association.
The funding plan serves as a measure of your current condition and as a road map for the future – which will make this the integral part of your Reserve Study. While you may be tempted to look only at the bottom line and determine what your Association’s monthly Reserve dues will be, individual features such as the inflation factor and replacement cost cannot be ignored. To ensure a sound budget throughout the years, each piece of the Reserve Fund puzzle must work together. The funding plan will recommend a monthly Reserve contribution, which is the amount each homeowner will pay in monthly dues (or quarterly) to the Reserve Fund only. The assessments are based on the funding plan developed to take your current Reserve account to the funding objective. If your Association currently has a weak account (or none at all), the Reserve dues will naturally be higher than those Associations with well-funded Reserve accounts.
Being prepared for non-annual expenses allows your Association to change the unexpected to the expected. Reserve Studies are one of the best strategies for an Association’s financial and physical health. In order to keep the replacement costs current, the Reserve Study should be updated (with a site visit) every three to four years.
While the importance of Associations building a strong Reserve Fund is no mystery, raising fees or assessments is often a sensitive subject with homeowners. Every Association needs a long-term planning goal, and a Reserve Study creates an accurate timetable for all major improvements. Here are some tips on how to address those sensitivities and sell the results of a Reserve Study without a revolt.
FIDUCIARY DUTY
One of the primary business duties of community Associations is maintaining and preserving property values of the Associations’ common property. To do this properly, Associations must develop funding plans for future repair or replacement of major common-area components.
COMMUNICATION AND RELATIONSHIPS
It is our belief that fundamental to the accomplishment of any of these objectives is two basic premises: communication and relationships. Communication is multi-faceted – between the board and the owners, between the board (and/or subcommittee) and the consultant (inspector/engineer), and between the consultant and the owners. To ignore these opportunities for effective communication will result in diluting the effectiveness and ultimate success of the implementation of any Reserve Study on the books for your Association.
Relationships nurture trust and confidence. Through effective communication, greater trust and confidence can be developed between the various parties involved. As a result, it is more likely that the recommendations of a Reserve Fund Study can be effectively implemented.
AN OUTLINE FOR SUCCESS
It is imperative that the scope of a Reserve Study be clearly defined before even seeking proposals from consultants. The following are a variety of options to be included in the scope of any Request for Proposals (RFPs):
- Define the project – Define exactly what is expected of the consultant. This should be as a result of discussion by the board and/or building subcommittee to determine what is needed. It is particularly important to decide whether the Reserve Study is to be based on simply replacing existing components or if upgrades and improvements should be considered.
- Interview the consultant – Getting to know the consultant, the people involved on your project, and their approach to the project is imperative to a successful relationship.The RFP should include a paragraph such as:
The board will select two to three consultants it believes to be qualified for the work and then conduct interviews. The objective of the interview is to meet the people who will be specifically working on our project, discuss a variety of questions, and generally understand the procedures the consultant intends to use for the project. A final choice will be made within one week following the interviews.
A Reserve provider’s objectives are threefold: to provide a broader perspective on Reserve Studies; to assist property managers with a successful presentation of Reserve Fund Studies; and to create opportunities for a more effective implementation of recommendations. - Pre-project meeting – The board (or building subcommittee) should meet with the consultant before any work begins, with the objective to refine and finalize the scope of the project. This is also an opportunity to determine what will be expected of the Association, or management company, and what will be expected of the consultant throughout the project. Suggested language for the RFP is as follows:
The first step after selection is a meeting with the board (building subcommittee) to review, refine, and finalize the scope of this project. At that time, the items to be covered, the procedures involved, the on-site protocol to be used by the consultant, and any special concerns of the board (building subcommittee) will be discussed. - Conduct an owner survey – The intent is to give all of the owners the opportunity to express any particular concerns they might have about the project. While this may seem risky, it has been our experience that it is actually quite effective. Such a survey would be accompanied by a letter from the Association providing all of the owners with the scope and limitations of the Reserve Study to be conducted and encouraging them to respond to the survey. Often the response to these surveys will reveal patterns that relate to Association responsibilities as well as giving owners the opportunity to note areas of concern.
The content of the survey should be reviewed and modified for each specific project. The final report would include a summary of the survey findings as well as any specific recommendations or observations related to the survey. - Follow-up meetings – It is important that the consultant be willing to discuss the findings of the study with the directors, building subcommittee, and unit owners. This is especially important if the study includes an evaluation of upgrades and improvements. Ideally, there will have been ongoing communication with the directors (building subcommittee) throughout the study process. A meeting with the unit owners would be a logical extension of that process.
- Report format – Effective communication means effective distribution of information. In larger Associations distributing the complete report is impractical and usually unnecessary. However, a condensed “owners’ report” is a valuable tool to distribute information. Typically, the owners’ report would include an executive summary and the financial projections that are part of the master report.
- Review draft report – For the Association, directors, and building subcommittee to be comfortable with the work of the consultant, it is important that there be interaction throughout the process. Once the site work is complete, the consultant will submit a draft report for review and comment by the directors/building subcommittee. Once the draft is approved, the consultant will issue a final report.
Additionally, updates to the Reserve Study should be performed every three to five years, depending on the size of your Association .
Now That You Have the Results, Where Do You Go From Here?
Now that you have the Association on board with the report, how do you go about implementing the actual findings? If your community doesn’t have a reserve fund in place, you still have several options as you start from scratch. One avenue that is growing in popularity is to start your Reserve dues schedule immediately, and deposit the money into an interest bearing account. Securing a loan from a bank that specializes in community Associations is another option that is growing in use. This can be a good alternative for Associations who are under funded but don’t want to impose a special assessment on the homeowners. However, with the payments spread out over a number of years, the interest added to the loan will end up adding quite a sum to the original loan amount. Planning ahead and making regular contributions to the Reserve Fund will reduce
the risk of such a loan.
Based on your starting Reserve balance, the Association will need to establish a preventive maintenance schedule. If your Association does not maintain the components as detailed in the report, you run the risk of putting your Association much farther behind in both maintenance and Reserve funding.
All common assets of your Association can successfully be maintained with advance planning. Stable budgets and an aesthetically pleasing property will keep homeowners content, all while attracting new homeowners. Major expenses are inevitable. However, these can often be headed off with advance preparation. Reserve Studies have the unique effect of allowing you to look into the future to ensure you plan appropriately today.
A quality Reserve Study performed by a Professional Engineer is the best way to continue planning for future repairs and improvements.
Read more about our Reserve Studies and request a proposal today! We are always available to discuss any questions or concerns you may have.