Reserve Studies - Lessons Learned

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17 February, 2019 By Joe Schuirmann, CMCA, AMS

In our industry, it is highly advocated that we recommend that our boards have a reserve study done for their communities. In these challenging times, reserve studies that were completed are being scrutinized with an effort toward extending the life of items and reducing costs.

For the older studies and in cases where there are not reserve studies, communities are putting off updates or even not having a study done due to budgetary constraints.

In regards to community funding, there are not a lot of sources for income. Many associations are cutting services as much as they can and were already on very tight budgets. This is compounded by collection problems and foreclosures. Homeowners are pushing to have fees as low as possible, even while understanding that the association is required to put away monies for capital expenses. This is a critical time to either get that reserve study done or to update the association's current study so the association does not fall behind and create deeper problems down the road.

In my experience, a good review of the reserve study assists with looking at regular and preventative maintenance. However, it is crucially important to avoid the critical mistakes that are often made by community managers and the boards they work with when either having a reserve study done or updated.

You can read a lot of articles on why a study should be done or how the community benefits from the study, but hardly anything practical on the steps of having a reserve study done. No matter what you want to believe, you are critically involved in the study. As the manager, you should either have access to or your fingertips on the crucial day to day information that most likely will be required. Don’t make the mistake of being a bystander in the process! The board is involved in looking at the overall big picture. If possible, a committee with clear direction greatly helps in the process. They are not tied down by the day to day items and may have perspectives that the board and the manager don’t.

I believe that there are at least five critical steps for the board and the manager before and after commissioning or awarding the study.

Step One: Understand and communicate WHAT the study will cover. The manager and the board should review the documents as well as the other items that they believe should be covered in the reserve study.

Establish a set of guidelines to determine what you will include and why it should be included. Baselines such as dollar amounts and frequency of replacement should be included. For example, I had a community in which we did not consider garage lights, which were $20 each. We had set a baseline of $5,000 for an item to be considered a reserve item. In an analysis, we determined that while it was only $400 for the lights, it was an additional $600 in labor to install the lights. For twenty buildings, it suddenly was a $20,000 project. This could have been phased, but the community had half the buildings built in one year and the remaining half the next year and due to deterioration, seemed impractical. It was something we then included in the study update.

I had a community determine that they should remove painting as a reserve item, even though they only did it every five years and previously had felt justified in having it added. These items should all be listed, along with any notes on repairs or replacements and if known, what those costs were. This is a critical step that can save a lot of frustration during the process and in the future. The study can even change as needs or desires of the community change.

Step Two: Know and communicate the limitations of the study. Many board members get frustrated and flustered when an item that was not in the reserve study rears its ugly head or an item in the study costs more than projected. What I usually emphasize (after the experience of two reserve studies) is that the study is usually just a VISUAL inspection of these items. You can only see so much in a visual inspection. For example, roads are built upon a base. The depth of the material (concrete or asphalt) is not known or may not be accurate. You can’t see the base material, the condition it is in, or the material that was used. As a visual inspection, it is not perfect, but it is the most reasonable and cost effective way to perform this work.

You can overcome these limitations, but there is additional expense and time that must be taken. Often, it is not worth that additional step.

Step Three: Take your time! I have had boards push for the reports, often quickly after it is awarded. Many want to be able to start planning, particularly if there may be an increase in the fees. I caution that it is far better to plan for the worst and if you believe there will be an increase, follow your instinct and pass the increase that you either think it will be or the most you prudently can pass that year. Give that information to the company performing the study.

It is better to take the extra time to get a good reserve study rather than a rushed product that may not be everything you need or want. There is nothing wrong with carefully reviewing each draft and eliminating mistakes and getting a good product. There may even be some additional expense, but in the long run it is probably worth the additional expense.

Speak with the reserve study company to have a good time frame for when the first draft will be completed. Set deadlines for the manager and the board in review and responding to the draft. In responding to the draft, it should be a written report that addresses the concerns and points out specific changes or questions on items. The board and manager should obtain a timeline for the next draft.

Step Four: It’s a collaborative effort. It is often critical to communicate to your board that this is a collaboration between you, them and the reserve study company. It is my opinion that boards will get out of it what they put into it.

Often boards make the critical mistake of putting the project on the shoulders of the manager, and then are angry at the finished product. While the reserve company is putting together the report, it is based not only on your documents, but their experience, your experience, the experience of the community and the desires of the community as expressed through the board of directors.

The report is only as good as the information put into it. It’s like the old computer adage GIGO – Garbage In, Garbage Out. Input, review and discussion by all parties is very important here, and it doesn’t need to be a burdensome task. Discussion could be contained to a ten minute item on the board meeting agenda. This may take multiple months, but it is worth it.

Step Five: Be Flexible! The biggest mistake that both managers and boards make is that they rigidly trap themselves with a static reserve fund study. What we want is a report that we can hang our hat on and one that we can use until year 20 or 30. However, they ALL recommend that the study be updated every 3 years or so for a reason – and it isn’t to make more money!

In any type of financial planning, it is recommended that you sit down with your financial planner on a regular basis and review your financial plan. There are websites dedicated to controlling your portfolio and making changes as needed. Why would a board NOT review and update this important piece of financial planning on a regular basis?

The reserve study should be looked at as you would any maintenance item; one that needs care and attention to remain in good shape and relevant to the community! Remember, an update does not always mean an increase. In fact, there are many benefits that can be found to a regular review and update.

In one community, we found that the regular review and preventative maintenance implemented actually extended the life of some items, which we were able to then extend and incorporate into the reserve study. This allowed for some increased flexibility in both the operating budget and in future planning.

With proper planning and implementation, the manager and the board can not only have a good working plan for reserve items, but also a plan to keep it up to date and keep moving the association forward.


Written by

Joe Schuirmann, CMCA, AMS

Mr. Schuirmann is a portfolio manager for Select Community Management, LLC and a member of the Community Associations Institute.