Stone Mountain Corporation

            Re$erve Studies^SM

Published in May/June 1998 Issue of Common Ground Magazine

by Chris Andrews,  Stone Mountain Corporation

When a community association hires a reserve study professional, board members often don’t realize they’re a key part of the reserve study process.  Board members do more than select the company and sign the check.  For the reserve study to be accurate, good communication between the reserve study preparer and association representatives is essential.

The less interaction you have with your reserve study firm, the more likely you are to be dissatisfied with the results.  Reserve studies are only as good as the background information they’re based upon. 

When community associations are dissatisfied with their reserve study, they usually cite the following reasons: 

·        The reserve component list (roofing, paving, etc.) was incomplete.

·        Useful life and remaining life of reserve components were inaccurate.

·        Cost estimates were unrealistic.

·        Measurements were inaccurate, also resulting in inaccurate cost estimates.

·        The reserve study firm imposed their notion of aesthetics on your association.  For example, suppose they scheduled a hallway remodel project or exterior painting next year when you had no such plans.

·        Reserve components having different replacement cycles were grouped as a single component.

·        The reserve study firm didn’t offer a draft review procedure.

·        The reserve study was difficult to understand.

·        Association representatives simply weren’t asked for their input. 

As a concerned association representative, you should make sure that the foregoing problems are not manifested in your reserve study.  After all, you’re paying good money for it.  Moreover, it is the board’s fiduciary duty to develop a reliable financial plan for the future. 

The primary goal of your reserve study provider during an on-site visit with you is to gather accurate information about your association.  During this meeting, keep in mind that your reserve study professional is primarily interested in gathering the following: 

Reserve Component Information: 

·        Reserve component list – What items shall be included in the reserve study? 

·        Estimated useful life and remaining life of reserve components.

·        Actual cost records for work done on reserve components.

·        Current contractor bids for forthcoming work. 

Financial Information: 

·        Fiscal year-end reserve balance.  Most reserve study projections start at the beginning of the fiscal year yet they are prepared before the end of the prior fiscal year.  Your reserve study professional needs to know your estimated fiscal year-end balance (current balance minus anticipated reserve expenses prior to fiscal year-end).

·        Interest rate on reserve account(s).  If multiple accounts, calculate a weighted average interest rate.

·        Tax rate on your reserve account interest.  This depends on whether your association files IRS Form 1120 or Form 1120-H.  State taxes may also apply.  Check with your CPA. 

You can streamline the process by providing only information relevant to the above items.  While a lengthy discourse on territorial skirmishes within your association may add color to your conversation, it detracts from important dollars and cents issues pertaining to reserves. 

Now you know what information your reserve study professional needs, here’s how you can be an effective participant in your reserve study. 

Before Your Reserve Study Professional Arrives 

·        Gather Bids:  If you are scheduling work to be done by contractors, have bids prepared before your reserve study preparer arrives for the on-site inspection.  There is often a wide variance in bids from different contractors.  Give a copy of the bid your board has accepted (or is most likely to accept) to your reserve study preparer.  Having actual bids from contractors helps your reserve study firm produce a precise reserve study.

·        Gather Financial Information:  Make sure you have all financial information, such as current reserve account balance, interest rate on reserves, and tax rate on reserves.

·        Gather Expense Records:  Gather reserve expense records from recent years.  Replacement history of significant reserve components (such as roofing, paving, painting) is also very useful to the reserve study provider.  Rather than telling the reserve study provider, “The roof was last replaced about 5-10 years ago,” ask other association members who were on the board at that time for more specific details.  Or, review association payment records.

·        Architectural Plans:  Bring a copy of the architectural plans for your development, if available.

·        Prior Reserve Study:  Bring a copy of your prior reserve study, if you have one.  Include a list of your board’s comments about the prior reserve study if there were some issues that weren’t addressed.

·        Obtain A Consensus:  Although your reserves study company normally determines when to schedule component replacement and what materials to use, sometimes it is appropriate for the board’s justifiable opinion to override that of the reserve study firm.  For example, scheduling of new playground construction should be determined by your association rather than your reserve study firm.  Your board should arrive at a consensus about timing and expenditures for such forthcoming reserve components before your reserve study preparer arrives.  Otherwise, when board members remain undecided about future plans, the reserve study professional must try to orchestrate the decision-making process for the board.

During The On-Site Inspection 

·        Walk-Around:  Insist on doing a comprehensive walk-around with your reserve study provider.  Make sure nothing is overlooked.  For example, dry rot or plumbing leaks are not always readily apparent.  You will save your time and the reserve study professional’s time if you make sure the initial inspection is comprehensive.  It is a lot easier to incorporate correct details into the report initially than to ask for revisions to the final draft later.

·        Convey Future Intentions:  Make sure your board’s reserve component replacement intentions are conveyed to your reserve study preparer.  For example, if you plan to replace your roof with a higher-quality, longer-lasting roofing material, tell your reserve study professional so he can then project a longer useful life and higher cost for the new roof.  Without your input, he will probably schedule replacement of your current roof with the same roof type and the same longevity.

·        Insist On Proper Grouping Of Reserve Components.  A typical reserve study shortcut is to group several reserve components having different useful lives into one general line-item, for example, painting.  Suppose your association paints its wood trim on a 5-year cycle, stucco on a 20-year cycle, and interior hallways on a 7-year cycle.  Grouping these as a  “painting” reserve component with a 10-year cycle is not an accurate representation of reality.  However, grouping may be done when you have a mix of low-cost items.  For example, a recreation room microwave, refrigerator, cook top and oven might be included as a “recreation room appliances” component rather than cluttering the reserve study with a line item for each.

·        Solicit Suggestions:  Ask the reserve study firm about new solutions to some of the problems your association has been having.  These companies see a lot of community associations, so they may be able to recommend a better roofing material, for example.  Or they may recommend a better pool filtration or solar system.  The reserve study can then include scheduled replacement of these items with longer-lasting components, thus saving the association money.

·        Maintain Impartiality:  Make sure board members don’t impose their personal biases on the reserve study provider (e.g., “I think we should do extra landscape beautification in front of this residence, and, by the way, that’s the one I live in.”).  The reserve study is intended to represent the interests of all members of the association equally.

After The On-Site Inspection 

·        Follow-Up Information:  Gather any follow-up information requested by your reserve study firm and send or FAX it to them.  Usually this involves procuring bids from contractors for pending work, asking former board members about replacement history, or locating past invoices from contractors, etc.  The sooner you do this, the sooner your reserve study will be completed. 

·        Make Sure Draft Reserve Study Is Complete:  When you receive your draft copy of the reserve study, scrutinize it thoroughly for omissions (refer to prior Common Ground Article:  “We’ve Received Our Reserve Study – Now What?” - Jan/Feb 1997). 

·        Convey Feedback To Your Reserve Study Firm Within The Draft Review Period:  Most reserve study companies allow 30 days for their clients to review the draft copy before producing a final copy.  Make sure your feedback is conveyed to your reserve study company within the allotted time.  If you wait six months or longer, the company may charge annual reserve study update fees to incorporate your revisions. 

To ensure that your reserve study is as accurate as possible, it is wise to take an active role in the production of your reserve study.  The greater the board’s interaction – the more precise your reserve study will be. 

From your experience overseeing the reserve study process, you’ll understand how your association can fund anticipated reserve expenses if it follows the recommended funding plan.  You’ll also be more prepared to justify the funding plan to your members. 

After all your effort, you may find that participating in comprehensive long-range financial planning is one of the most satisfying aspects of your job as a representative of your association.

Chris Andrews is a principal of Stone Mountain Corporation, a reserve study firm in Santa Barbara, California. 805-681-1575. 

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