Many years ago, a well-respected reserve preparer told me that reserve studies were not management tools, rather they were ‘savings plans’. While I might agree in principal, I couldn’t disagree more when it comes to managing associations. I believe reserve studies are one of the most important tools associations have in terms of budgeting and planning long term repair and replacement of their most important assets and it is critical that managers not only understand these studies, but also have a way to make the data useful to their association(s).
In California, physical inspection and update of reserve components is required every 3 years. Yet there is NO requirement for boards to use that data! Often times, reserve studies are completed and accepted without any type of formal board review and the “study” goes onto the shelf. That’s like fixing the budget then never looking to see if you are over or under expenditures.
Part of the problem is the way reserve studies are computed and presented. There is seldom a single line item for “painting”. Yet from the study, one can get an idea that the complex will need painting in about 3 years. We group those major components together and enter the ones that need to be addressed in the next 3 years into our working database (www.campro.us) as “Scheduled Maintenance”. That way, between studies, we have a way to remind the board that painting or roofing or siding is due to be inspected and/or bid.
We track completed maintenance so when the next reserve study is due, we can provide the reserve preparer with a report on all the work that has been completed on reserve components over the interim 3 years and at what cost. These components represent the biggest expenses the association incurs, yet many boards don’t even understand the basic methods available for funding them.
Full Funding means the association wishes to have the full amount of money on hand in the reserves equal to the amount of money as outlined by the reserve study at any given point in time.
Threshold Funding: The association wishes to ensure that the balances on hand in the fund over some number of future years (usually 30 or 40 years) remains above some threshold to allow some safety for estimate variations.
Baseline Funding: The association wishes to maintain positive balances in the fund over the next thirty years. In essence, a threshold of zero.
Each type of funding has the potential for impact on the association. Too much funding (is there such an animal any more?) and dues can be extremely high… too little and special assessments become the norm.
Several years ago, when laws were looser, my company assisted in preparing a couple of reserve studies using our qualified contractors and vendors to conduct the physical inspection of the components. The list of components had originally been provided by the developer and updated using qualified reserve preparers over the years. Yet, when I coordinated the study, we found many “missing” components. Amongst them was all the copper plumbing and electrical in the pool areas, the coping stone and the concrete decking. We spent $50,000 replacing one of our 2 pools last year because the copper pipes had rusted out and were leaking, the electrical conduit had disintegrated and the concrete deck had heaved so badly we were in danger of having the health department close the pool.
Since these pools were built in 1965, they did not meet existing code, so when we pulled the permits, we had to meet all the existing code for any public facility including dual drains, new fencing, etc. The project cost a total of $70,000 (with fencing) and took 2 months to complete. Fortunately, we had started funding this project over 4 years ago so no special assessment was required.
This year, we have discovered that our hot water re-circulating lines are failing and will need to be replaced, yet “plumbing” is not included in our reserves. We are in the process of assessing the lines and getting estimates so we can start planning the replacement process.
I know that many professionals will say that these are the kinds of items that are covered under the “contingency” portion of reserves. What I also know is that many associations are not funding reserves adequately and the “contingency” is one of the first items to be reduced or eliminated altogether.
Do you have a current reserve study? When was it last updated? How do you fund your reserves? Has your association had to pass special assessments for major repair or replacement of components that are part of this study? How (and when) does your board use the information in the study? I believe fiscal management requires us as board members and managers alike to be able to answer these and other reserve related questions. Our role as custodians of our physical assets, demands it.
Gayle J. Hasley,
Community Association Manager
Community Association Homeowner
gayle@campro.us
www.campro.us
