“Assessment increases and stronger reserve funds will be needed to repair aging properties” was the number one prediction of experts surveyed by Common Ground, the magazine of the Community Associations Institute.
The most important element of credible reserve studies is valid component data.
Recent legislation in several states also emphasizes properly funded reserves and cites reserve studies as a necessary procedure in estimating funding requirements.
Capital Reserves are for projected repairs and replacements. Items such as regular periodic (non-annual) repairs (e.g., painting), irregular periodic repairs (e.g., deck surfacing), foreseeable failure, catastrophic failure, and outdated design/aesthetics may be included in a Capital Reserve budget.
Scope of Services
The standard, or full reserve study consists of five elements. The Component Inventory is the task of selecting and quantifying Reserve Components. Condition Assessment is the task of evaluating the current condition of the components. Life and Valuation Estimating establishes the Useful Life, Remaining Useful Life, and Repair or Replacement Cost estimates for the Reserve Components. Fund Status is determined by projecting the current and future funding of the Capital Reserve Account against current and future repair and maintenance requirements. The Funding Plan is intended to create options for achieving the desired funding levels to offset anticipated expenditures.
It is critical at the outset of any project to clearly define the scope of services. Annual maintenance items are typically excluded from a reserve study. The minimum scope of service may also be defined by statutory regulation.
Standards of Reserve Studies
In 1998, the Community Associations Institute adopted National Reserve Study Standards. The standards define three levels of service (a full reserve study as defined above, an update, and an update without an on-site visit), definitions of various terms, and the contents of the report. The standards also create the professional designation Reserve Specialist. The designation is awarded by CAI to individuals with the appropriate background, experience, and references, following a review of their work by the Reserve Specialist Designation Board.
Prompted by foreclosures and mismanaged properties, a number of states have already passed legislation governing the management of Common Interest Realty Associations (CIRAs). Among those that have passed legislation are Alaska, California, Florida, Hawaii, Illinois, Indiana, Massachusetts, Michigan, Minnesota, Oregon, Texas, and the District of Columbia. Some states address reserve studies broadly. Others are more specific.
For example, the California Davis-Stirling Common Interest Development Act states in part: At least once every three years the board of directors shall cause a study of the reserve account requirements of the common interest development to be conducted if the current replacement value of the major components which the association is obliged to repair, restore, replace or maintain is equal to or greater than one-half of the gross budget of the association for any fiscal year.
Florida statutes are even more specific. These accounts shall include, but are not limited to, roof replacement, building painting, and pavement resurfacing, regardless of the amount of deferred maintenance expense or replacement cost, and for any other item for which the deferred maintenance expense or replacement cost exceeds $10,000. The amount to be reserved shall be computed by means of a formula which is based upon estimated life and estimated replacement cost or deferred maintenance expense of each reserve item.
How to Select a Reserve Study Consultant
The most important element of a credible reserve study is valid component data. Inaccurate cost information, improper assessment of the condition of each component, and failure to examine ways of maintaining components to prolong their useful life can lead to underfunding or, almost as problematic, overfunding of the reserve account.
Reserve studies are a professional opinion. The value of that opinion is directly related to the knowledge and expertise of the person rendering it. Always ask the consultant for references and a statement of experience and qualifications. Even this may not tell the whole story, however. Here are some other factors to consider.
- Is the consultant locally based? Materials and their performance will vary according to regional preference and climate.
- Does the consultant thoroughly understand building systems? Databases work only for typical systems and components, not actual ones.
- Does the consultant have the ability to diagnose problems, design repairs, and oversee construction? A reserve study also includes an evaluation of defective components and systems in need of immediate repair.
- Will the consultant be available for questions and follow up? Often, there is a need to explain the findings to the board or individual members.
- Does the financial model have credibility? The model and format should be prepared by someone with an accounting background and comply with the guidelines of the American Institute of Certified Public Accountants.
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