Planning is the Key to Success: Reserve Studies for Community Associations
You have heard it time and time again that planning is the key to success. It should be no surprise that managing a thriving community association requires a set plan of action. Instead of a daily agenda or architectural blueprint, association board members and property managers use reserve studies as a guide to maintaining the community's financial stability and physical assets.
Without a preventative maintenance, timely repairs and the necessary replacements, the common elements of a community association will deteriorate. Roofs will leak, façade will fall and retaining walls will crumble. If damage to landscaping is left unfixed, the site will grow increasingly unsightly and unwelcoming. If pavement cracks and pot holes are ignored, the streets will become a nuisance and a danger. Undoubtedly, the value of the property will plummet if the community is not properly cared for.
Without a strategy, maintaining an entire community can be a difficult task. For instance, how would an association pay to rebuild a retaining wall that suddenly collapsed? The problem would have to be fixed quickly because the nearby building could be structurally unsound and the grounds would be a mess. Without enough money in the operating expense account, the board would be forced to conduct a special assessment or get a loan in order to pay a contractor to make the necessary repairs.
In today's economy, borrowing money can be an arduous and time-consuming task. Banks are implementing more stringent loans requirements and are taking less risks. The Federal Housing Administration (FHA), for example, now requires community associations to prove that they have an "adequate" budget established in order to receive loan approval.
Likewise, a special assessment can be a frustrating process. A special assessment is a one time fee charged to all unit owners to pay for a specific task that benefits the community as a whole. Although the owners are well aware of the higher expense, many will not recognize that a special assessment is for the greater good of the community. Unless the broken retaining wall is blocking the entrance to their home, many owners will not acknowledge the need to pay for repairs or replacement. Unless the pool is unusable or the roof is leaking into their home, many unit owners will be apathetic and some will not pay their dues. In this case, the board's hands may be tied and essential repairs may be postponed or ignored for lack of funds. Another complication is that the board may not have the authority to approve a special assessment without a community-wide vote.
In addition, the additional cost of a special assessment affects only the current property owner, regardless of how long they have held the title. In other words, it penalizes those who are paying the fee since the former owners were able to use and enjoy the amenities without ever contributing to long-term repair and replacement needs. Setting aside money to fund reserves via monthly contributions is the only fair way to address the continuous costs of maintaining a community. With a reserve account that is funded monthly, each owner contributes his or her fair share based on the length of time of ownership. Most importantly, the association will have the money in its reserve fund when needed, which is exactly why having a plan is the key to success.
A reserve study can serve as a funding plan that gives associations the time to and means of preparing for future common element expenses. It includes a comprehensive report of major common element components that will require replacement, giving community association managers, board members and property owners assurance that future common element expenses are identified early enough to implement a plan to pay for those projects.
Professionally prepared reserve studies include both a physical and a financial analysis. The physical analysis includes a site visit to visually inspect the property's common elements. The engineer determines the existing condition of each common element (presented as an estimated remaining useful life) as well as its quantity and estimated replacement or repair cost. The financial analysis is an evaluation of the association's current reserve status (measured as a cash balance or percent funded).
After determining the estimated remaining useful lives of the association's components and identifying the current status of the association's reserve fund, the reserve study report establishes a stable and equitable funding plan to offset the anticipated future major common-area expenditures. The engineer calculates a recommended reserve contribution rate (funding plan) and a projection of future income/expenses. This analysis tracks the reserve fund balance, annual reserve contributions and the annual expenditure trends over a thirty year period allowing the association to make an informed decision in regards to how much money should be set into the reserve fund each year to feel comfortable that a special assessment or loan will not be required.
Overall, the careful inspection and financial analysis of a reserve study provides community associations with a sophisticated planning tool that will help them to balance and optimize long-term property values and membership costs. Although unexpected speed bumps (fire, floods or car accidents that cause property damage) are bound to happen, a community with an updated reserve study will be better prepared to deal with them. A community with a reserve study is a community with a plan and an association with a plan holds the key to a success.
If you are interested in a proposal to prepare a reserve study or update for your community, please contact Kipcon at your convenience.
