As a board member, you have a fiduciary responsibility to your community to act in every homeowner’s best interest. While this can be difficult, especially in a governance role, it’s imperative that Boards maintain this obligation.
Why Are Reserve Studies Important for Boards?
Reserve studies are a way to fulfill this responsibility. However, a fair number of associations do not commission a reserve study because they are fearful of the results it may present. Questions such as “What if we are underfunded?” and “What if there are critical projects that we are currently unaware of?” may influence the Board’s decision to commission a reserve study, as the results could be perceived as a direct reflection on them. Or, they may not want to potentially open a can of worms that is the unknown.
However, the decision not to commission a reserve study out of fear directly contradicts your fiduciary obligation to act in your community’s best interest. Regardless of your association’s current situation, a reserve study is the first step you should take in righting any ship that may be off course. By documenting the current condition of your property and its finances, and by providing a path to sustained financial and physical health, the “bad news” a reserve study could bring will always be counterbalanced by a plan for remediation.
Imagine putting off going to the dentist for over a year. You may continue putting off going to the dentist because you are fearful of what they will find, whether it be cavities, staining, or a deeper issue. But while you’re putting off the services out of fear, the issue remains and is likely to get exponentially worse over time. In the long run, this results in greater deterioration and more money spent to fix the issue.
The same is true when an association waives a reserve study in hopes that community life can continue as normal without conflict. While it may be scary for a Board to realize they might be underfunded, their community is in physical distress, or a large-scale project needs immediate attention, it is vital to face these challenges head-on before they get worse. Your roofs do not care if your community is positioned to take on replacement – they will fail when they fail. If the association does not address a pressing issue, further issues will most certainly arise.
If an association is underfunded or not properly maintained, a reserve study helps prioritize near-term projects and presents a path to adequate reserves. The reserve study report is not the end-all, be-all; your consultant can work with your Board to ensure the study meets the community’s specific needs. Our team can work with you to adjust expenditure thresholds, to incorporate historical replacement schedules, and more to ensure the reserve study meets your specific needs. While it is hard to determine whether a community is in physical or financial distress, a professional reserve study will always present a path forward.
At Reserve Advisors, we work with our clients to help them develop a path forward. If an association is underfunded, our industry-leading team of experts can help evaluate alternative funding solutions that support your community’s capital planning needs. If needed, we help our clients evaluate using bank loans, special assessments, reserves, or a combination of the three to fund future projects. All of these options can be incorporated into the reserve study report, and your consultant will be there with you every step of the way.
Explaining the Reserve Study to Homeowners
If a reserve study shows insufficient reserve funds or overdue maintenance, conveying this news to homeowners can be challenging. Keep in mind that such issues are not a reflection of the Board, as in most cases these issues stem back several years or more. Additionally, regardless of the study’s findings and recommendations, it’s vital to give homeowners additional insight. This becomes especially important when you have residents who may be sensitive to annual fee increases.
As residents of your community, these folks deserve transparency into both the property’s physical and financial condition. After all, it will be their dues that are affected by the Board’s decisions, and they should be provided with an explanation for each decision.
Because the Board is made up of neighbors, friends, and community members, sharing unfavorable news can be uncomfortable or intimidating for the Board, which is why we’re here to help. Our reserve study consultants are available to attend a Board and/or Ownership meeting to explain our findings and address potential concerns about adjustments to annual reserve contributions.
Your consultant will set expectations with owners about which projects need to be done and why, saving Boards the burden of being the bearer of decisions that might be viewed as biased or unfavorable. Because your consultant is from a third party, they are not interested in anything but your association acquiring and maintaining adequate funding and addressing capital projects in a timely manner.
It’s crucial that reserve studies be presented in a way that’s both easy for homeowners to understand and that sheds a positive light on the current situation. Your reserve study is just the beginning of your community’s journey towards prosperity, and commissioning the study is step one. In order to most effectively communicate the reserve study to homeowners, the Board (and Management) should read over the report first, understand its implications, and work with your reserve study provider to make sure the final report meets the needs of your community.
At Reserve Advisors, we strive to provide your community with a path forward. No matter the report’s findings and recommendations, we’re confident in our ability to help your community achieve long-term financial and physical health.