Reserve Study Guidelines

Are you aware of the significant changes in the Community Association Institute (CAI)’s recommendations for best practices in future reserve fund studies? If you are not, you are not alone. In July 2023, the Foundation for Community Association Research published its Best Practices – Community Association Maintenance manual. Let me explain why this 68- page ‘Maintenance’ manual should be a must read for every condominium or HOA board member. It is available in printed form and the no cost digital version can be downloaded from CAI’s website.

Most reserve fund studies in the recent past have used CAI’s Best Practices – Reserve Studies / Management manual published in 2007 as a guideline on how to perform a quality reserve fund study. Though this guideline is still relevant, things have changed with the new 2023 ‘Maintenance’ manual. No longer is a reserve fund study’s primary focus budgetary but rather future reserve fund studies should expand to incorporate both safety and preventive maintenance needs. As CAI states, CAI “…recognized need for greater clarity in the role of maintenance planning and programming in communities”.

Following the June 2021 tragedy in Surfside, Florida with the collapse of Champlain Towers South and the loss of 98 occupants, CAI commissioned a special committee of reserve fund experts contributing to the Condominium Safety Public Policy Report (October 2021). Among other points of emphasis was condo boards’ life-safety responsibilities and duties of loyalty and care. The special committee’s ‘Maintenance’ manual further recommends expanding typical reserve components to include preventative maintenance in future reserve fund planning as well as infrastructure inspections when warranted.

This is a departure from prior reserve fund guidelines where preventive maintenance and infrastructure inspections were not included or funded as reserve component line items. It is now recommended the judgement of the reserve study provider determines the inclusion of these types of component items when based on a degree of engineering certainty. It is further suggested the community’s historical pattern of maintenance expenses should be considered in determining if any of these expenses should be included in the reserve budget. Other historical reviews should include any work performed on the reserve components since the prior study was performed. In fact, all available service provider reports and information regarding the physical components should be reviewed.

What’s Included

While reserve studies will now reflect the board’s life-safety responsibilities, reserve studies will continue to evaluate information regarding the physical status and repair/ replacement cost of the association’s major common area components using component inventory, a condition assessment, and valuation estimates. Some of the new ‘Maintenance’ manual’s recommendations are subtle while others are not, such as decreasing the recommended period of site inspections from five to every three years.

Another significant recommendation is components are not restricted to physical items. This could include professional inspections, evaluations, or related building services when additional expert advice is needed, and an asset’s deterioration is in question. Therefore, common area preventive or corrective maintenance projects qualify as reserve components if they otherwise meet the definition of ‘component’. Thus, a reserve component is not required to be a cyclical replacement. Now a periodic structural inspection could be reserve component.

In the past component replacement was estimated as a ‘like kind’ of component. It is now recommended consideration should be given to logical upgrades to an existing asset or system now viewed as obsolete or inefficient in meeting the needs of the association. Judgement on these upgrades can be based on ongoing preventive maintenance costs and an evaluation of energy costs using higher efficiency equipment. Selection of components and their estimated useful life and remaining useful life may consider energy usage and ongoing maintenance costs with the resulting impact on total budgetary expenses and total life cycle costs.

Long-life components (i.e., > 30 years) have long been a subject of debate on their presentation in reserve studies. Often boards ignored long-life infrastructure components, hidden electrical and mechanical systems and their associated replacement costs. In effect, if the component’s replacement did not occur within the reserve study’s 30-year window, the study ignored future funding needs and kicked the can down the road for a future board to address. The new ‘Maintenance’ manual recommends long-life components should not be ignored but made visible in the study. Methodologies for reporting long-term projects include:

• Inclusion of long-life components with funding in the study.
• Addition of long-life components with funding at the time when they fall within the 30-year period from the date of study preparation.
• Identification of long-life components in the component inventory, even when they are not yet being funded in the 30-year funding plan.

Despite this new emphasis on preventive maintenance, it should always be remembered a reserve fund study is not a preventive maintenance plan, and a preventive maintenance plan is recommended for all associations. A quality reserve fund study is a path to avoid deferred maintenance; special assessments; lower property values; and liability exposure for all. This is a plan to meet the board’s primary mandate to ‘Maintain, Protect and Enhance.’

Written by Jack Carr, P.E., R.S., LEED-AP, Senior Consultant Criterium Engineers
Published in Condo Media

Q: Over the past few months, I’ve heard a lot of discussion about reserve studies and condition surveys. Are these the same, and, if not, how do they differ, and why and when should our association obtain one?

A: This is a great question because it is not asked often enough. I cannot count the number of times I have responded to a condominium board’s request for a meeting to discuss their stated need for a reserve fund study only to find they actually needed something else. That something else could encompass a wide range of engineering services such as a full structural evaluation; a water infiltration study; and/or a plumbing or electrical system update.

Condo and HOA boards have a lot on their agenda for their periodic meetings. Issues regarding landscaping, by-law enforcement, assessment collections to name a few, so the need to spend money to update their last reserve study is not a popular item. Even though the Community Associations Institute (CAI) and the association’s property manager may recommend a reserve budget update every three to five years, the board members are not eager to look at the calendar.

In fact, most discussions about updating the reserve budget arises from some perceived maintenance problem and not the calendar. Perhaps it is the rise in complaints in water stained ceilings from leaking roofs, or poor curb appeal of the aging building facades, or the developing potholes in the roadways that create the agenda item requiring capital repairs and the analysis of the reserve budget.

With the guidance of an experienced property manager or knowledgeable committee member, the board will recognize the benefit of hiring a professional engineer (PE) and reserve specialist (RS).  These professionals provide the most complete review of the facility’s common elements and will develop a reserve budget reflecting the future scope of repairs and associated cost estimates. With this understanding the board can prepare a Request for Proposal (RFP) and conduct interviews to hire a qualified firm—from there, things can start going wrong.

Common Misunderstanding

They go wrong because of miscommunication due to the lack of understanding of the industry’s language and terminology. Let us assume the condo’s primary concern is structural problems given the recent attention of the Surfside, Florida disaster. The communication problem starts with the engineer’s RFP interview during which the interviewee remarks to the board that one of the advantages of hiring an engineering firm to perform a reserve study is their structural engineers can comment on the potential structural distress issues found during the inspection of the building(s). This can be a point of communication disconnect and the beginning of unfulfilled client expectations.

In the engineer’s mind, he thought he was clear in telling the board his review of the structural elements would produce a report listing the structural problems found and the engineer’s recommendations of actions to be taken. What the members of the board may have heard was for the price of the reserve fund study they would receive an engineer’s structural evaluation of the condition of their facility with an estimate of repair costs to budget for their reserves and for a contractor.

A basic reserve study focuses on estimated remaining useful lives of existing common elements. When structural problems are known before or found during a reserve study, a condition study or assessment is needed to determine the soundness of the facility. This scope of work can be added to the reserve fund study or provided as a separate task. This study may call for inspection, material testing, engineering calculations, and more that are outside the scope of a reserve study. To avoid this, better questions and answers are needed on all sides of the issue.

Article written by Jack Carr, P.E., R.S., LEED-AP, Criterium Engineers
Published in Condo Media December 2021 edition
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