Believe it or not, budget season is upon us again. Each association requires different levels of involvement from their board during the budgeting process. While a professional community association manager will assist you when you’re getting started, it’s important for boards to make sure the manager understands the community’s long-term vision by sharing any future plans so that your community doesn’t encounter an unexpected financial disaster. This is why a well-researched reserve study is one of the community’s most important investments.
The reserve study is the unsung hero of successful community associations and here is everything you need to know for your board to conduct an effective one.
What is a reserve study? A reserve study is an assessment of all of the community’s common elements, and includes an inspection and analysis of the remaining useful life of items the association is responsible for maintaining, such as roofs, concrete, mechanicals, fencing, and much more. Most reserve studies will cover 20-30 years’ worth of projects. After this information is assessed, a funding plan is created to estimate the cost for the replacement of these items at the end of their useful life, and what the community should be saving annually in order to afford the work when it is needed. The inspection by the independent engineer is important because an engineer can often point out potential problems that a homeowner or a general maintenance vendor does not have expertise to see; in addition, their opinions provide support for the board’s decisions.
A good reserve study can help you predict your community’s financial future and avoid potential funding problems. It is vital for boards to actively participate in the reserve study process; as with many tasks in life, the more you put into it, the more you will get out of it. Even if a community manager has worked with an association for several years, they still won’t have the same knowledge base as the board member who has lived onsite since the community was built. The insights from historical resources are particularly helpful if you are having your community’s first reserve study prepared. Once some of the community’s information has been memorialized in your Reserve study, you have a great resource that future boards and managers can easily access when they plan projects and budgets.
Just as with your annual budget, the reserve study is a guide, and not a hard and fast commitment to the projects. Oftentimes, a board will find the need to do some work sooner than a reserve study forecasts, and other work may be postponed. This means that a Reserve study should be updated every few years, particularly after a large project has been completed, to make sure reserve funding stays on track.
How do you actively participate in your reserve study process to get the most from it?
- Start with attending the inspection with the reserve engineer, and make sure they understand everything your community is responsible for – of course, you need to understand the parameters as well in order for that to work. Have a fence that might be yours or might be your neighbors’? Are patios something owners have to pay to replace or are they association responsibility? This is the time to review your governing documents and possibly consult with legal counsel to ensure everything is accounted for.
- Next, review your history. Your community manager should be able to pull old contracts and financials to tell you when you last completed a project and how much it cost last time you painted, replaced the boiler, or did other work. Has a vendor advised you that there is something that will require more than just removal and replacement or basic repairs – such as a building defect, like missing weep holes around windows, which will need to be fixed when you do tuck pointing? Is there a recent legal change in your area requiring you to update your fire & life safety systems before the end of their useful life?
- Lastly, discuss the future, and include your “wants” as well as your “needs.” Do you want to replace the wood fence with vinyl or decorative aluminum? Do you want to change paint colors, which may require two or more coats of paint instead of just one? Is there a high efficiency option to consider when replacing your lighting or HVAC units? A reserve study normally plans for replacing like with like. If you know that you will be upgrading, tell your reserve engineer now so they can make sure the funds are allotted for this work.
You may find some areas where your board chooses to make minor repairs and defer replacements. If, for example, you plan on patching your asphalt for at least another five years because of your current reserve fund balances, let the engineer know which year you plan to do the work. When talking about deferring projects, don’t forget to discuss the overall costs – you will spend more money patching the roof and repairing drywall damage over the next few years than you would if you just got the work done now. If you can get a low interest loan even though you don’t have cash in hand, you may actually save money by doing it now instead of holding off.
Many of these future planning discussions are best held once you get the draft of your reserve study. Almost every company that performs a reserve study will give you time to review the draft and request changes, though the timeframe for review varies greatly. This review timeframe is an important opportunity that many associations miss out on. Take the time to analyze the predicted costs and replacement timeframes. If a cost seems especially low or high, ask your community manager to talk to a local vendor that performs that service and get a bid, or at least a budget number, that you can share with the reserve engineer. They are making estimates based on their experience, but they are not contractors, so sometimes their numbers need to be adjusted.
If the timing of some of the replacements, particularly the projects planned in the next five years, seems off, say something. Did you just spend $5,000 repairing the entry steps so they last another 15 years, and the study says replace them in five? This is the time to speak up. Your board, or even a reserve study ad hoc committee, should meet and review the study in detail. You know your community best. Don’t be afraid to ask questions and ask for changes if you think something is over (or under) estimated.
Once you have your final reserve study and funding plan, you will immediately be able to gauge your community’s financial health. Even if you can cover all of your operating expenses each month, if you find your reserve contributions are not sufficient to cover upcoming capital projects, then you need to consider raising your assessments, or possibly a loan and/or a special assessment, depending how near-term the project is. Having the reserve study, prepared by an independent professional, but closely analyzed by your board, will provide a great plan overview for your homeowners, especially if you do need to make a change in assessments. Being able to share with your homeowners your strategic direction and outlining the steps you are taking to save them money in the long run and increase property values can make an assessment increase a little more palatable.
If you don’t have a reserve study yet, get started on it now. If you do have one, make sure you are utilizing it as the incredible tool that it is, and are actively involved in the update process. If you have questions on your reserve study, ask your professional community association manager for help in reading and understanding all the great information it contains. Once you have the plan for capital projects, you will find your annual budget process will be easy; generally speaking there won’t be major changes in your operating expenses from year to year. Your reserve study is step one to a more successful community, and making your job as a board member easier!
ABOUT THE AUTHOR
Lea Marcou, CMCA, AMS has worked in customer service for over 15 years. She started with Associa Chicagoland in 2008, and then transitioned from Customer Care Representative to Community Association Manager in 2010. She has worked with a diverse portfolio of properties, including mid-rise condos, townhomes, single family homes and developer and commercial properties. She is an active member of the Community Associations Institute, where she attends industry events, seminars and trade shows. Lea has obtained her CMCA® and AMS® designations, and hopes to earn her PCAM® in 2016. Contact her at 847-490-3833 or Lea.Marcou@associa.us.