By Michael Kelsen, R.S, Aspen Reserve Specialties
You have successfully completed the task of reviewing and accepting the Reserve Study prepared by your professional. Most think this well executed plan is a pipe dream made up by the professional. It is not. Many years of knowledge and expertise went into this document to help you better prepare for future projects. The Reserve Study is a budget tool that will map out how to address future capital expenses. So, what do we do with it now?
First off, use it as a guide to determine where your assessments should be set. Do not determine your Reserve contribution in “reverse order”. All too often, we have seen an association start with what the dues were for the previous year, subtract all your operating expenses (insurance, management fees, utilities, service contracts, etc.), then arrive at the Reserve contribution with what is leftover. This is the wrong approach. Typically, the Reserve contribution makes up a large percentage of the total assessments. To properly establish your budgeted income, go through all the operating expenses, then add the Reserve contribution recommendation to arrive at the total assessment level.
Use it as a guide for upcoming projects. While we all would like to tout ourselves as being capital project psychics, we are not. Anything can happen at any moment. But, through our experience, we have a great idea of when a project will need to be addressed. However, we are not perfect, so when we are recommending that a project is addressed, the Board of Directors should evaluate the project and if they agree with our opinion, get some bids and recommendations from reputable contractors to perform the work. Also, use the estimated costs your Reserve professional provides as a comparison to the bids being received. The professional has no vested interest in the estimates, so based on their expertise, the number should be within a small percentage of bids being received.
Analyze major projects coming up in the next 5 – 10 years, but don’t lose sight of projects beyond that either. The major projects within the next 5 – 10 years will require special planning and funding to complete the project in the right manner. By properly funding the Reserves, it will allow you to choose the best contractor for the project, not just the cheapest.
Keep a history of Reserve project contracts in an electronic file. Often, a Board or community management will change, and by keeping the contracts easily accessible, future management and Boards will have information as to when projects were last completed. Provide those contracts to the Reserve professional when they are preparing the study so they can utilize that information for the report. This will ensure that actual costs are being used for the current report since we all know every association is different and costs could vary from community to community.
Review the document frequently. In addition to reviewing the report at least twice a year (early part of the year to go over this years recommended projects and later in the year during budget season), the report should be updated by a professional at least every two years. After a full Reserve Study (Level 1) is completed, we recommend performing a Level 3 (financial review) at least 2 years later to update projects that have been completed and update the estimated replacement costs. Two years later (4 years from the initial full report), a Level 2 (on-site and financial review) should be completed to ensure components are aging as expected, as well as updating the estimated costs. We all know how often costs are changing every year and if too much time is allowed to pass between updates, the further behind in Reserve planning the association may be getting themselves into. In a sense, we recommend the Reserve Study is professionally reviewed at least every two years.
Share the results of the study. The entire membership, as well as potential home buyers, should have access to the report. In a world of transparency, the homeowners have the right to have the history of Reserve recommendations, and how the board has followed through with its fiduciary responsibilities, at their fingertips. Homeowners should be able to pull up the report from a secured portal so they can review it at their leisure. In addition, Reserve Studies are becoming a household name, and potential buyers into the community has a right to know the financial health of an association and what they are facing once they become an owner in your community.
The Reserve Study can be a very valuable tool for the association that will help the community maintain or enhance the property values by utilizing it in the right way. The initial shock factor may seem daunting, but in the long run, you will be better off by living in a community that is well maintained and gives you pride to come home to a beautiful home.
About the Author: Michael Kelsen, R.S. (#32 in the nation), PRA (Professional Reserve Analyst), has been conducting Reserve Studies since 1991 and has personally completed over 7,500 reports in his career. In 2001, Mike left the company in which he received his experience to start Aspen Reserve Specialties and is proud to be soon celebrating our 25th year in business. His passion is educating the community about the importance of Reserve Studies and stress that we are not here to raise your dues, we are here to help you protect and enhance your property values.
