Why a Reserve Study is in Your HOA’s Best Interest?
Almost every homeowners association has a need for building reserve funds for the purpose of future repairs and replacements of the common elements. A reserve study is your association’s best resource to keep your funding on track, fulfill your board’s fiduciary responsibility, and maximize value to your homeowners.
What is a reserve study? A reserve study is a capital planning tool used for budgeting. All HOA's budget for "operating expenses" based upon what their annual operating expenses include. However, on what basis do they fund their non-operating "reserve expenses" for future repairs and replacements? A reserve study is an objective tool to help explain these future expenses and what they include. Beginning with the association’s existing reserve funding, it provides a full-orbed funding plan of future repairs and replacements. A reserve analysis is designed to anticipate and offset wear and tear to the common elements or property, and forecasts when major expenditures will need to be performed.
What are some perils or risk exposures of HOA’s that do not have a reserve study? Associations that lack appropriate reserve funding may find themselves having to pay out huge special assessments, in addition to the regular assessment, in order to make up for any lack of funding in their operating funds to cover the costs of major projects. When homeowners are required to payout additional thousands of dollars, this can also negatively impact collections and whether the project may be adequately paid for by the homeowners without incurring additional bank loans expenses. When special assessments are required this may impact home sales in a community, especially when your community has to compete with other local communities that do not experience this problem.
Who should perform a reserve study for a homeowner association? There are excellent professional reserve study companies specializing in homeowner associations that may be used to conduct a study. Typically, a reserve study is performed by engineering professionals who have the necessary credentials for addressing buildings, construction, and properties. Experienced engineers in reserve study companies inspect hundreds of properties, and provide the knowledge and best-practices in the industry for your association.
What happens in a reserve study? The study provides a comprehensive on-site inspection by engineers and construction management experts who consider each association’s common area property, maintenance practices, and priorities. Not all properties age the same due to materials, construction type, weather conditions, use, and other wear and tear factors. By identifying where your association property stands currently, the reserve study can map out where you will need to be for future repairs and replacements. It typically provides a thirty year analysis of what your reserve funding should include, as well as when you will need to make improvements.
Why updating a reserve study regularly is advisable? There are several reasons why it is prudent to keep your reserve study updated. In some cases, some amenities common elements may have been overlooked in a previous study and the reserve funding does not reflect the needs for these items. Another reason is that new construction materials and industry standards are always being developed that may be better suited for your association. In some cases, they may be less expensive than former materials used or the cost may be inflated. Every Board of Directors should be able to direct their association having peace of mind that their reserve study is keeping them on track. Another reason is that reserve study specialists offer executive level industry expertise and monitor economic data including inflation and interest rates to help you keep your ideal funding level on target.
Associations that perform reserve studies are more likely to meet their funding future repair and replacement requirements than associations who neglect this important resource. It is not fair to the future residents of your community to pay for the total cost of those future repairs and replacements. Everyone should pay their fair share each year. It is much easier to meet the reserve funding target by setting aside sufficient funds each year. This way, even if your association is off just a bit it may not require huge special assessments and any difference can often be paid out the operating funds.
Copyright 2017 by Cambridge Management Group, LLC. All rights reserved.
DISCLAIMER: The information contained herein is intended for informational and educational purposes only and should not be construed as offering legal advice. For legal advice, seek the counsel of a competent attorney specializing in Community Association Law on matters pertaining to your state and community.
For more information visit our web page at www.CambridgeHOAPropertyManagement.com or contact us at: Support@CambridgeHOAPropertyManagement or by calling us at 704-874-1820 or 844.612.1515.
