By Bryan Farley, Association Reserves
Reserve contributions are typically the single largest budget item for an association, (anywhere from 15%-45%). Therefore, if a community member asks, “Why are our dues so high?” pointing to the reserve contributions would be a great place to start.
Why is this?
Reserve funds are allocated to offset the ongoing deterioration of the common area assets. Have you ever seen water staining in your condo after a storm? Your reserve contributions will pay for repairs and the eventual replacement of the leaky roof. Is the exterior wood trim warped and faded? Again, your reserve contributions are hard at work compensating for the natural deterioration of the wood and paint.
How will a board member know whether or not his association is adequately prepared to pay for the ongoing deterioration of the building’s assets?
The best way to do this is to hire a firm that specializes in preparing reserves studies per the National Reserve Study Standards. The National Reserve Study Standards provide guidance to accomplish this. A reserve study professional’s goal is to give client association boards the tools to anticipate and prepare for the repair and replacement of their communities’ common elements. A stable and reliable reserve component list is necessary from year to year, association to association, and provider to provider. The National Reserve Study Standards ensure consistent application and interpretation when preparing reserve studies.
There are many firms that a board member can choose from, but due to the number of firms vying for business, a board member may be overwhelmed by the high number of choices. Regardless of which firm the board chooses, make sure that whoever is completing your reserve study is a qualified professional that has earned proper credentialing.
It is important for a board member to know that a reserve study is most effective when it is prepared by a non-biased, third-party consultant. A credentialed reserve study preparer has the freedom to address potential and current component issues with fairness and objectivity.
For example, if the reserve account is poorly funded and the building suffers from a dilapidated roof, the association will need to either increase the reserve contributions and/or utilize outside sources of income like a special assessment or a loan to fund the replacement. If a reserve study preparer is beholden to the board’s urgent demand to maintain low monthly dues, then the reserve study preparer’s recommendation will be tainted. This is an obvious conflict of interest that should be avoided.
What if your board knows how to use a spreadsheet and would like to update their reserve study internally? This could also include a manager that was hired under the promise to keep dues low, or a company that desires to consolidate clients’ budgetary matters.
All of this is legal, per section 8 of the CACM Code of Professional Ethics:
“The (Manager), who has contracted with a client to perform community association management services, and who is also engaged in the practice of another profession, may perform other professional services provided there is full disclosure to the client.”
However, the Community Association Institute – Best Practices (Report #1 Reserve Studies/Management) recommends that reserve studies should be completed by independent third-party consultants.
A community’s board has a fiduciary responsibility to run a (potentially) multi-million-dollar not-for-profit real estate corporation. Board members may feel obligated to potentially influence reserve recommendations or percent-funded calculations in order to avoid disappointing the neighbors that voted them in. Opportunities may present themselves for the board when they can avoid "rocking the boat" for their association by potentially changing a few remaining useful lives of a component or lowering a cost. This may temporarily solve a potential budgeting issue for the association, but over time, future owners will have to pay up for past failures or inaccuracies.
In our experience, the data shows that 70% of associations are underfunded. In other words, the majority of associations are unprepared to pay for the ongoing deterioration of the common area assets. These numbers cannot be sugar coated, and failure to address these issues can result in a massive drop in home value due to deferred maintenance.
It is best practice to hire a credentialed and professional Reserve Specialist to perform your association’s reserve studies. Your community will benefit from the peace of mind and long-term financial preparedness that a professional reserve study will provide.
Bryan Farley, RS is the president of Association Reserves, CO/UT/WY. Bryan has completed over 2,000 Reserve Studies and earned the Community Associations Institute (CAI) designation of Reserve Specialist (RS #260). His experience includes all types of condominium and HOAs throughout the Rocky Mountains.