Condominium Associations: Best Practices for Reserve Studies

If you were embarking on a cross-country road trip, with many stops and sights along the way, it’s doubtful that you’d begin driving without a map or GPS in hand. So, suppose you’ve started your journey as a condominium association board member. Why would you feel confident leading your residents through the coming years without a capital plan or a repair and replacement schedule for common assets? Reserve studies are essential in responsibly planning for the physical and financial future of your condo association – they are your roadmap for effective community governance.

Here, we will discuss best practices for condominium associations, challenges you may face along the way, and how to ultimately use your reserve study to lead your community to a prosperous future.

Understanding Reserve Studies in Condominium Associations

A reserve study is a long-range capital planning tool that helps boards anticipate and prepare for the repair and replacement of their condo association’s common assets. Reserve studies begin with a comprehensive, visual inspection of the physical condition of each of your community’s common assets and a thorough examination of your current reserve funds. Using this information, a prioritized schedule of capital projects is created, along with a reserve funding plan to offset these capital projects over the next 30 years. Essentially, capital projects, whether it be a roof replacement or paint refinishing, are the stops you’ll make on your road trip. The reserve funding plan is the route you’ll take to get to those stops successfully.

Condominium associations are made up of numerous shared amenities and common areas, all of which need to be maintained to preserve both their safety and appeal. However, many of these maintenance projects are not cheap endeavors, and they must be planned for accordingly, with costs distributed fairly among current and future residents. And while board members are incredibly familiar with their community as a whole, they generally do not possess the technical knowledge to project when these maintenance projects need to occur or how much they will cost. That’s why a professional reserve study is crucial to maintaining a well-run association with an actionable plan for the future.

Unique Challenges in Condominium Reserve Planning

When it comes to reserve studies and reserve planning, condominium associations can face unique challenges that make it more difficult to prepare for the future accurately:

• Failing to Conduct Adequate Reserve Studies
  • Many condominium associations fail to update their reserve studies regularly, leading to inaccurate project timing and costs. Some associations may rely on their own estimates rather than hiring a qualified professional to conduct their reserve study.
• Underfunding Reserves
  • Boards may feel pressure to keep monthly dues low, and while this may seem like a way to keep residents happy, it almost always leads to chronic underfunding and hefty assessments or loans in the future. Without a reserve study, boards may not be aware that they are underfunded. Without insight into component conditions, issues may not be caught until the project is critical and costly.
• Aging infrastructure
  • Older condominium buildings often require more frequent and costly repairs. Without an up-to-date reserve study, these issues can go unseen and unplanned for.
• Shared Amenities and Infrastructure
  • Condominium communities are often made up of a wide array of shared amenities, such as pools, gyms, and parking structures, all of which require maintenance and future replacement. These amenities can wear out faster than expected due to overuse or misuse, which can complicate lifespan predictions. Additionally, systems like HVAC or security may become outdated before they physically deteriorate, requiring earlier replacement.
• Diverse Stakeholder Interests
  • Owners, residents, board members, and managers may have different priorities and financial capabilities. Some stakeholders may prioritize modern amenities while others focus on cost savings. Some residents may resist increased dues or long-term investments that don’t yield immediate results, and frequent board turnover can lead to changing priorities and inconsistent reserve funding strategies.
• Legal Compliance
  • Condominiums in certain states must comply with laws and local regulations regarding reserve studies and reserve funding, which can vary over time and force associations to adapt quickly. Non-compliance can lead to legal and financial risks.

Best Practices for Effective Reserve Studies and Reserve Funding

While reserve study providers follow their own set of best practices put forth by the Community Associations Institute, there are also best practices that condominium associations can follow to ensure their reserve studies are practical and actionable.

• Choosing a Qualified Professional Reserve Study Provider
  • CAI’s Reserve Study Standards state that the most qualified individuals to conduct reserve studies are Reserve Specialists. CAI grants Reserve Specialist designations to individuals who have prepared at least 30 studies in the last three years, possess adequate education and experience, and have committed to the highest ethical and professional standards.
• Compiling the Component List
  • While your reserve study provider can assist you in selecting which components to include in the study, it’s critical that board members understand what assets the association is responsible for. The component list will be based on the association’s governing documents, application of the Reserve Study Standards three-part test, and any applicable state statutes or civil codes.
• Conducting Regular Reserve Studies
  • After your initial reserve study, it is best practice to conduct a Level II Reserve Study Update with a Site Visit every three years to ensure that the remaining useful life of each component and its respective funding plan are still accurate, leaving minimal room for surprise expenses that could force deferred maintenance or compromise the safety of your residents.
• Periodic Structural Inspections
  • Periodic structural inspections are recurring inspections of your building’s primary structural elements, and are especially important for mid and high-rise buildings, in addition to older buildings with aging infrastructure. The frequency and cost of these inspections can be incorporated into your reserve study. If the inspection finds maintenance is necessary for any structural element, the timing and cost of the maintenance project can also be included in the reserve study as an expenditure.
• Funding Plan Collaboration
  • Boards should work together with their provider to choose a funding strategy that most aligns with the community’s current status and long-term goals. Condominium associations can select a funding strategy by balancing risk tolerance with the community’s best interests. Whether an association is severely underfunded or in a solid financial position, there will always be a viable path forward. However, boards need to remain engaged in this process and collaborate openly with their reserve study provider.
• Transparency and Communication
  • To avoid confusion or conflict within the community, boards should remain transparent with unit owners. By sharing the results of the reserve study, the community’s financial health and planned projects can be a topic of open communication. Reserve funds should be viewed as long-term investments, so the accumulation and use of the funds should be thoroughly explained to residents to avoid potential misunderstandings. At Reserve Advisors, we are always available to present our findings to the board, so everyone has a complete understanding of the results and the recommended roadmap for funding reserves and completing necessary projects.
• Utilize and Revisit Your Reserve Study
  • When you’re on a road trip, you don’t look at your map once and then believe you have the whole route memorized or that there won’t be any detours. Reserve studies are the same! It’s crucial to utilize your reserve study when creating annual budgets, and it’s even more critical to revisit the study to ensure alignment with present and future needs. Changes that seem small, like the addition of an entry monument or improvements to shared amenities, can impact the reserve study’s funding plan. By reviewing the plan often, boards can get ahead of any issues that could burden the condominium down the line.

Board Member Resources

To assist board members in reserve planning and conducting reserve studies, we’ve created the following resources that provide both education and guidance. To view or download these resources, simply click the link to open each document in a new tab.

Reserve Funding 101: The Importance of Reserve Funds, Funding Methods, and Best Practices

Reserve Study Update Checklist: Assess Whether It’s Time for an Update

New Board Member Reserve Study Orientation

Reserve funding and planning for future projects may seem overwhelming. Still, with a professional reserve study in hand, your condominium association can move forward into its future like a well-planned road trip – each stop along the way prepared for, with a route that won’t lead you astray.