Why Have a Professional Reserve Study?

Every community association has three functions – to serve as a business, a government and a community. Community associations are generally nonprofit corporations, functioning in many ways as businesses with revenues (association dues, clubhouse rentals, revenues from golf course or restaurant, etc.) and expenses.

As a business, the board needs a business plan for the maintenance of the Association assets. Which assets or parts thereof (i.e. partial pavement replacements, phasing roofing replacements) will require repair or replacement, when, and at what cost? These are the most important questions one must ask in determining a forecast of future capital projects. When managing the contributions (assessments) of hundreds of homeowners, it is essential to provide as accurate a forecast as possible.

As a result of conducting hundreds, if not thousands of reserve studies, professional firms have the expertise to apply engineering success stories from other associations to determine the most reasonable reserve budget that is consistent with the board’s objectives. The benefit to homeowners is that present and future owners are treated fairly and equitably. As an example, special assessments are typically conducted because those who lived in the community previously did not pay their fair share and as a result, current owners have to pay extra.

Road Map

A professional reserve study is a continuous ‘blueprint’ for the future. Board members frequently change. While future board members may not understand the logic or reasoning behind prior decisions that were based on internally conducted reserve studies because the author(s) are no longer around, a professional reserve study firm will be available to discuss their reserve study, the methodology used, and considerations that went into the analysis years after it was conducted. Also, the independent reserve study provider can help future boards with periodic updates to the original reserve study to ensure the association remains on track.

Consistency is another benefit of having a professional reserve study conducted. If more than one individual participates in the development of the reserve study, how can the owners be ensured a level of consistency among the individuals in completing the technical aspects of the report? And when periodically updated, will the same individuals be available to make changes to the original reserve study?

Liability and support of internally developed reserve studies are often difficult challenges. Does the Association have errors and omissions (E & O) insurance for the in-house reserve study expert or only insurance for its directors? Is the “in-house expert” covered by the association’s E & O insurance policy? Will the expert be willing to stand behind his or her conclusions to other homeowners, buyers, and lenders?

Turnaround time is another factoring question. Can an internally produced reserve study be conducted in a timely manner? Quite often, timelines are not met because information from third parties takes longer to obtain than expected, some of those participating in the assignment can get distracted with personal business (don’t forget, board members aren’t paid for these activities!) and completing the reserve study could drag out for a year or more. Just about that time, elections take place and the board turns over, and the association is back at square one – no long-range plan.

Boards routinely seek outside expert advice concerning audits, production of financial statements, and legal advice. Homeowners will have more confidence in their board because they sought outside expert advice for a reserve study as well as other professional services.

Another advantage is knowing that their reserve study was conducted within the national guidelines of the Association of Professional Reserve Analysts (APRA) and Community Associations Institute (CAI). The real value to owners is knowing that the reserve study was conducted independently of any personal agendas, either real or perceived.

The second part of the business plan is knowing how to obtain funds to pay for capital projects when it is necessary. An independent, professional reserve study will not only identify future costs, but should determine a minimum and stable level of funding to accommodate these future capital projects. Thus, homeowners can be reassured that there is minimal risk of special assessments.

Quite often, the independent reserve study provider can make recommendations that prolong or extend the life of common elements and save homeowners significant dollars over the long term. For example, many times associations run into problems with leaking foundation walls. Bringing in excavators and obtaining two or more bids to correct the problems can be a far more expensive solution as opposed to seeking impartial advice from an independent reserve study provider offering alternative and often less costly solutions to a particular problem.

Financial ReviewAn independent professional reserve study is a great marketing tool to prospective buyers and their lenders. The independent reserve study shows that the association is managed with expert advice, which adds value to the property. Prospective buyers, particularly second time buyers, are more shrewd and likely to ask not only how much is in reserves, but what is the money in reserves to be used for? 

As a governance, the board has a fiduciary responsibility to the owners not dissimilar from the responsibility corporate board members have to shareholders. They must, to the best of their ability, strengthen the value of the organization. The reserve study must comply with the AICPA (American Institute of Certified Public Accountants) accounting guidelines for financial reporting and state reporting requirements, which change on an annual basis in some states.

A professional reserve study also reduces claims of financial mismanagement because the board sought out the advice of an independent reserve study expert. Demonstrating sound fiscal management to the owners with a professional reserve study provides owners with a high comfort level that their investment in their property is being managed properly.

Last, having an independent professional reserve study is simply good business sense.