Stone
Mountain Corporation
Re$erve StudiesSM
Re$erve StudiesSM |
| [ Home ] Are Reserve Studies Required in California?Yes!
California Civil Code 1365.5 requires that most community associations perform a
reserve study every three years with annual reviews of current reserve status:
California Civil Code 1365.5 - Section 1: (5)(d)
At least once every three years the board of directors shall cause to be
conducted a reasonably competent and diligent visual inspection of the accessible
areas of the major components which the association is obligated to repair,
replace, restore, or maintain as part of a study of the reserve account
requirements of the common interest development if the current replacement value
of the major components is equal to or greater than one-half of the gross budget
of the association which excludes the association’s reserve account for that
period. The board shall review this
study annually and shall consider and implement necessary adjustments to the
board’s analysis of the reserve account requirements as a result of that
review. The
study required by this subdivision shall at a minimum include: (1)
Identification of the major components which the association is obligated to
repair, replace, restore, or maintain which, as of the date of the study, have a
remaining useful life of less than 30 years. (2)
Identification of the probable remaining useful life of the components
identified in paragraph (1) as of the date of the study. (3)
An estimate of the cost of repair, replacement, restoration, or maintenance of
the components identified in paragraph (1) during and at the end of its useful
life. (4)
An estimate of the total annual contribution necessary to defray the cost to
repair, replace, restore, or maintain the components identified in paragraph (1)
during and at the end of its useful life, after subtracting total reserve funds
as of the date of the study...
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Gross
Budget excluding Reserve Budget (Operating Budget) =
$300/month or $3,600 per year for
insurance, minor landscaping for small common green space areas, etc.
This is a typical operating budget for a small association with minimal
maintenance. |
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Clearly, the $8,820 total reserve component replacement cost exceeds one half of the $3,600 annual operating budget.
So unless a small association only has a green space and has no roads or exterior structure maintenance responsibilities, Civil Code 1365.5 most likely requires that they do a reserve study just like medium and large associations.
Of course, to verify whether or not your particular association is not required to do a reserve study, you need to go through the calculations shown above.
Whether or not a reserve study is required, board members and property
managers have a fiduciary responsibility to perform due diligence in the
budgeting process so that their associations properly maintain their
property.
A reserve study and its recommended funding plan provide are often indispensable
in this process and show due diligence on the part of the board or management
company.
When a new association is built, the State of California
requires the developer to have a "Department of Real Estate Form
623" (DRE-623) prepared. A
DRE-623 is the initial budget prepared for the developer usually by a
third-party company or reserve study company. Based on the calculations in
the DRE-623, the initial monthly member fees are determined for new condominium
units being sold to new buyers.
The DRE-623 contains an operating budget and a reserve budget. The reserve
calculations in most DRE-623's are usually based on takeoffs from building plans
or blueprints, so there are usually no site visits, measurements, or
inspections.
Most new associations approach a reserve specialist during their third year of existence and state they need their "first" reserve study. After doing many reviews of original DRE-623 budgets for new associations, we have concluded that more often than one would like, they lack detail or have errors & omissions.
These inaccuracies in initial reserve funding can put an association on an insufficient reserve funding trajectory. By the time the reserve specialist does the first on-site physical inspection and reserve analysis in the third year of its existence, the association's reserves are already underfunded.
The intent here is not to belittle the work of the DRE-623 preparers. Without question, it is difficult for anyone to perform a good "primordial" DRE-623 reserve study without having physically measured and inventoried all of the reserve components via an on-site visit. But that's how things are done at the initial stages of the condominium development process as on-site inspection and inventory simply doesn't seem to happen.
Some of the types of DRE-623 errors we've encountered are:
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Lack of attention to specifics
in the site plans. Most DRE-623's list a reserve component
called "paved surface area" includes all paved surfaces,
which often includes both concrete driveway aprons, sidewalks, and asphalt
private streets. An association having 40,000 SF of concrete driveways
& sidewalks and 60,000 SF of asphalt was correctly shown to have 100,000
SF of "paved surfaces," which is what the blueprint says.
Yet in the DRE-623 budget calculation, they assumed 100,000 SF of paved surfaces needing
asphalt sealcoat every 3 years and asphalt overlay every 18-20 years, when
only 60,000 SF of that 100,000 SF represents asphalt paving. This is one of the few errors that resulted in overfunding reserves. |
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Inaccurate inventory of
reserve components. The DRE-623 reserve component
measurements & totals of items such as exterior light fixtures, paved
surfaces, painting surface areas can be inaccurate because some of these
items are difficult to tally when viewing the as-built plans. Occasionally,
however, there are some egregious errors such as stating that there is only
one elevator when there happen to be two elevators side-by-side in the same
building. An on-site inspection would, no doubt, catch this type of
error. |
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Omission of numerous reserve components. Some DRE-623 reserve budgets tend to be overly generalized in that they only calculate reserve funding for large expense items, but forget to include a lot of essential reserve components such as wrought iron replacement, termite treatment, siding replacement, custom nameplate entry signs, paving patchwork, future dryrot repairs, etc. |
CONCLUSION: The key point here is that it is usually not a waste of money for an association to contract a reserve specialist to do a comprehensive site-visit & inspection to produce an accurate reserve study during the first year of its existence. This will set the association off on a proper reserve funding trajectory from the start.
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