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The Reserve Study Process – From Start to Finish
In order for your association to have a reserve study
completed, here are the steps that need to be done. Also included are some ideas to make the process most
beneficial to you and your association:
- Get
a cost proposal letter from us.
We will ask you questions about your association, including the
number of units and the types of amenities (pool, spa, tennis, etc.).
Based on that information, we will send you a cost proposal with
background information and some informative reserve study articles we’ve
had published in national condominium magazines.
- Get
approval for the reserve study from your Board.
- Fill
out and sign the Reserve Study Agreement. Note that on the front
page, there is some financial information that we will need such as your
projected fiscal year-end reserve balance, interest rate on reserve accounts,
and how much does your association currently contribute to reserves
annually.
If you’re not sure how to project your fiscal year-end reserve
balance, contact us and we may be able to provide some guidance.
The reason we need to know your fiscal year-end reserve balance is
because reserve studies must be done on a fiscal-year boundary per
California Civil Code 1365.
- Contact
us to set up an appointment for an on-site inspection of your association.
During this visit, we will develop an inventory of your associations
capital assets such as roofing, paving, pools, etc.
We will also estimate when you will be needing to replace each item
in the future. We like to have
as much input from you as possible, so you may want to invite other board
members or people who have a good knowledge of the long-term maintenance
history. We’ve often seen reserve studies prepared with little input from the Board
of Directors or the management company and the result is often inaccurate
reserve studies.
The timing of replacement of some items often depends on the
aesthetic interests of your association, not us. We don’t impose our notion of aesthetics on your association. Rather, we solicit your
opinions on scheduling issues such as when your association plans to paint their wood trim, for
example. Different associations
have different standards.
If no one is available to meet on-site, we perform the physical inspection
and measurements and then if we have questions about issues, we discuss them
over the phone with you.
-
Meet with us at your
association so we can evaluate your long-term capital expense requirements. During the first part of the meeting, we'll
sit down with you and
discuss recent reserve expense projects that have been completed and how
much they cost. We'll also review any
prior reserve studies you've had done and take note of changes or
deficiencies that you've been concerned about.
It is helpful
if you can come prepared with any invoices or cost history information from
your files. Then we ask you
about your forthcoming reserve expenditure plans so we can accurately
incorporate them into your reserve study.
Finally, we take a tour of your association, in which you point out
key issues of importance from a reserve expense standpoint.
For example, you might want to show which units have dry-rot problems
that have to be addressed, or you might point out the delamination in the
pool plaster that will require a pool resurfacing next year.
Oddly enough, the reverse is often true in that we often call attention to
issues that Board members are not aware of that can become problematic in
the future. Most Board members
who have participated in a reserve study site visit find the experience
quite informative.
After all, we see hundreds of associations and we have had a wonderful
opportunity to learn from their mistakes and triumphs in resolving various
construction and maintenance problems.
This sharing of information about how other associations are solving
problems is an unspoken side-benefit of the reserve study process for which
most clients express deep gratitude.
- At
the site visit, ask for a brief overview of a sample reserve study.
Since the reserve specialist won’t be present when you
receive the reserve study in the mail, a few minutes spent explaining the
key parts of a reserve study will save you a lot of time when you do
receive your copy. Education is an essential part of this process.
- Provide
follow-up information as requested.
After the site visit, we usually have some follow-up questions that
we need to clarify in order to complete the cost calculations and long-term
cash flow projections that are an integral part of your reserve study.
- Reserve
study report preparation. Once
all the physical analysis data has been gathered and the financial analysis
has been done, we produce a bound 35-100 page report, depending on the size
of your association. The goal
of a reserve study is to provide you with:
a) A measure of your reserve fund status (how well-funded
is your association relative to depreciation of all assets?), and
b) A reserve funding plan such that your association will be able to fund
anticipated reserve expenses as projected.
- You
receive your reserve study.
The reserve study will be sent to you within 5 days to 8 weeks after
we have received the contract from you and all the required information.
The turnaround time depends on the turnaround option you choose with
a rush priority costing more than an economy turnaround.
At this point, you might want to read the following article by Chris Andrews
of Stone Mountain Corporation: "We've
Received our Reserve Study - Now What?" -- Common Ground Magazine
-- Jan/Feb 1997
- Review
your reserve study. We
offer a 30-day draft review period during which time, you may review the
reserve study and look for omissions or fine-tune some of the reserve
expense scheduling. Because we
try to be as detailed as possible, in about 90% of the cases, the first
draft suffices as the final draft.
Nevertheless, you should insist that your reserve study provider offers a
draft review iteration as a part of their fee. Several of our clients have told stories of reserve
study providers who were completely unreceptive to making changes to the
first draft. “This is
it,” they were told!
This is unfortunate because an initial reserve study draft can provide
valuable assistance to the decision-making process. For example, some associations might be facing a special
assessment for some imminent large expense and they don’t know how much
the special assessment should be. At
the same time, they understand the need to leave some funds in reserves after
the large expense project has been completed, but just how much?
A good reserve study will help them calculate what the baseline
reserve expenses will be over time and how to fund them on a yearly basis.
And, with those constraints in mind, the proper amount of special
assessment can be determined.
In other cases, some associations have begun the reserve study process
thinking they will need a special assessment for some projects, but when all
the expenses are projected and offset by their healthy reserve income,
they’re quite pleased to find they don’t need to special assess their
membership. Instead, they can
fund everything with a modest increase in monthly fees.
And some associations utilize the draft review process to fine-tune how much
they want to increase member fees for the next year, subject to whatever
“political climate” exists at their association.
One might initially think that this is corrupting the process of
performing an objective reserve analysis to have a board member ask a
reserve study provider, “My association members are going to have a
mutiny if we raise fees more than $20 per month next year!
Which reserve expenses can we push out one more year into the future
to reduce the reserve funding requirements?”
Yet in many cases, this is not an issue of corrupting the process. Most
reserve study providers acknowledge that there are “mission-critical”
items such as replacing a roof that absolutely must be scheduled in
the reserve study when needed, versus some items that can be scheduled
arbitrarily such as doing a landscape renovation project, or postponing
painting for a year if the paint is in reasonable condition.
It is for the latter cases that a good reserve study provider will be
flexible enough to incorporate the plans of the Board into the reserve
study.
- Present
the reserve study results (fund status and funding recommendation) to your
board.
Once you are satisfied with the reserve study, you or someone who is
most familiar with it needs to present the results to the board and then the
board votes to approve the reserve study and documents the review and
approval process in the minutes.
This is part of complying with the requirements of California
Civil Code 1365.5 which requires a reserve study every 3 years and that the
board shall review the reserve study.
Some boards ask their reserve specialist to attend a board meeting to
present the reserve study results and answer questions.
This is usually quite beneficial, especially in cases where the board
or the membership is intensely divided over the issue of fee increases.
Having an objective third party present to explain the rationale for
funding reserves at the recommended levels and to answer questions in a
clear and concise manner helps to cut through those divisions.
People are often more apt to agree to a reserve funding plan if it is
presented by an unbiased person rather than a board member for whom they may
happen to harbor animosity. Note
that board meeting attendance by a reserve specialist is not typically part
of most reserve study contracts, so expect to pay for the reserve
specialist’s time to attend.
- Disclose
the findings of your reserve study to your membership in your annual budget
mailing. This disclosure must be sent between 45-60 days prior to your
fiscal year-end. Note:
Assembly Bill 2718 changed this deadline to 30-90 days prior to your
fiscal year-end after July 1, 2005. In
the State of California, Civil Code 1365.5 requires that you disclose the
following:
ü
How much
money is needed to fund projected reserve expenses
ü
Percent-Funded
Estimate
ü
Reserve
Component list, useful life, remaining life, current cost to replace
ü
Cost of
items at end of useful life (future cost).
ü
Indicate
whether or not special assess needed
ü
Disclose
methodology used to determine calculations
You may summarize the above in
your annual budget letter and indicate that a copy of the reserve study is
available for all interested members to review.
Finally, keep in mind that California Civil Code 1365.5
requires annual reviews of the reserve study by the board in addition to having
a reserve study with a site inspection done every 3 years.
It is common for mid-to-large size associations (over about 40-60 units)
to do annual reserve study updates (without a site visit), especially if
assumptions and circumstances have changed since the last reserve study.
As you can see, the reserve study process is not
particularly complicated, and the rewards of sound financial planning are well
worth the effort.
Now you're ready to take the leap!
Photo by Yuko Kurahashi
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