Reserve Study Companies develop a long-term budget report that assists an association in preparing for future major expenditures. These expenditures typically occur on a periodic basis (every 2+ years), as opposed to annually. As a result, the Reserve allocation makes up a significant portion of the total monthly dues. A Reserve Study provides the essential information that is needed to guide the Board of Directors in establishing the budget in order to run the daily operations of your association. It is suggested that a third party professionally prepare a Reserve Study since there is no vested interest in the property. Also, professional Reserve Study Companies know what to look for and how to properly develop an accurate and reliable component list.
Now, why do we need it done? There are many misconceptions as to why a Reserve Study needs to be prepared. We will outline a few of these misconceptions and provide an answer as to why you need a Reserve Study for your association.
Our association is 20+ years old, and we have run our property well over this time period.
Congratulations! It is great that you have been so successful the past twenty years. Now, you may need to consider some major expenses in the coming years and how are you going to plan for those expenses. Most likely roofs will need to be replaced, the asphalt will need to be overlaid, and the siding is starting to deteriorate and will need to be replaced soon. In most associations, these combined projects will cost well over a million dollars to replace. This doesn’t count mechanical equipment, pools, concrete work, etc. If the proper amount of money has not been set-aside in the past, it is likely the association will need to Special Assess, defer the project, or obtain a loan from a bank. More on the Special Assessment issue later. If the association goes to a bank for a loan, the bank is going to want a Reserve Study in place to make sure the association has a plan in place to avoid this problem in the future. If the project is deferred, the appearance of the property may be affected and the property values will decrease. Over the first twenty years of an association, there are a lot of major expenses to deal with. Some may be easy to handle as an operating issue, or from whatever money has been set-aside in the past. It is the major expenses that should concern the owners and how is the property going to pay for them.
We have in the past and will continue to Special Assess for the project.
While this may be an option for many associations, it is not fair and equitable to recent new owners. If an owner has bought into the association within the past couple years, it is not right for that owner to pay for siding that previous owners has enjoyed the previous 20 years. Ideally, the proper amount of money has been set aside (1/20th per year) so everyone is paying equal amounts to the Reserve fund for the time period they lived in the community. Also, if an association has a history of Special Assessments, then lenders may shy away from lending money to potential buyers. Lenders do not want to take a risk of providing money to someone that may be hit with a large Assessment, resulting is a chance they may not be able to afford their mortgage payment. In addition, a history of Special Assessments may deter potential buyers from even considering purchasing a unit in the community.
We are a brand new community. We don’t need to worry about major expenses for 20+ years.
True. But painting will need to start within 5 years of construction. Asphalt will need to be seal coated within 2 – 3 years of construction. Concrete repairs will be needed soon. While roofs, siding, mechanical equipment may not be necessary for many years; there will be many expenses the association will incur in the meantime. Also, an analogy we like to use is “Are you going to wait until you are 55 years old to start preparing for retirement?” Or, “Are you going to wait until your child is 16 years old before setting money aside for college?” We know everyone hopes to win the lottery for retirement, or receiving a scholarship for college, but for most of us, this will not happen. Therefore, a plan needs to be set in place as soon as possible, and for associations, that usually begins when the construction has been completed. In fact, several builders are starting to have money set aside in a Reserve account before turnover to the association occurs.
The Reserve Study may cost a couple thousand dollars and we can apply that money to replacing something.
Again, true. However, the money spent on a Reserve Study will come back and pay for itself within in a very short amount of time. A well maintained property will increase in property value, where an association that has deferred maintenance, “because they don’t have the money”, will decrease in value. Also, if there are two similar properties with similar assets and amenities, association “A” has $100,000 in the bank, while association “B” only has $25,000 in the bank, association “A” will be more appealing to potential buyers due to the funding status. The Reserve Study will also assist the Board of Directors in preparing for future expenses. It will help determine what projects will be coming up soon. It will also act as a guide in comparing bids from contractors. Reserve Study Companies have no vested interest in the community. We will be providing the facts with accurate numbers and estimated replacement costs. If the bid to replace the roof is coming in at 2x the estimated cost in our report, you may want to ask the roofer why the cost is so high. Tell them an outside party estimated the cost to be only $XXX,XXX. Inquire with the contractor before contracting with them as to why the cost is so different.
We just had a study completed a couple years ago. Why do it again?
Reserve Studies typically cover a 30-year period, so the information should be accurate for 30 years. Wrong. While we like to know the exact cost, the exact replacement time of a component, and the exact inflation rate and interest earnings, we all know that things can change from year to year. Also, what if the association doesn’t follow the recommendation in the report? These are all factors that will affect the financial section of the report, and possibly the recommendation. In addition, elements have an effect on how components will age. Therefore, unless the current Reserve balance is very close to what was predicted in the previous report and every component has been addressed on schedule, then it is time to update the past report. We recommend updating Reserve Studies every 3 – 5 years.
We know there are several other scenarios as to why an association does not need a Reserve Study. The bottom line is that an association cannot run their “corporation” accurately without all the facts. A large part of your monthly dues should be going to a Reserve account. How do you know the funds being set-aside are accurate without having a report in place? Part of obtaining all the facts is to have a professionally prepared Reserve Study completed for your property.
We hope this letter has addressed questions and concerns a Board of Directors may have in “why it is important to have a Reserve Study for our association”. Good luck don’t be afraid to rely on Reserve Study Companies if you ever have any questions or concerns regarding Reserve Studies.