What you need to know, and tips for success.
Successful community associations, like successful businesses, plan ahead. Almost every budget has some level of contribution to a reserve fund which pays for major capital expenditures as the need arises. Most covenants require the reserve fund, and you need the money to maintain the quality of life in your neighborhood or complex. Will your reserve fund balance actually meet those financial obligations? If you are asking this question during budgeting season, you are not alone.
The Importance of Community Association Reserve Studies
I’ve seen many examples of both under- and over-funded reserve funds. The best way to determine if you have adequate funds is to commission a reserve study. This is essentially a physical and financial analysis of your common area elements (pool, clubhouse, elevator, retention pond, etc.) with a recommendation for what it will cost to maintain them, and your reserve fund, over time. Professional firms charge about $3-5,000 to conduct the study. This is not an exact science, but it is still a science. Do it the right way.
Here are 5 tips for effectively commissioning a reserve study:
- Hire an expert. Use an engineering firm with references from similar communities. Don’t do it yourself. You’re not an expert and you don’t want the liability. We can provide some recommendations.
- Be Prepared. The firm will ask you questions about your existing facilities. Know when things were originally built or installed, and their projected useful life.
- Get quotes. Seek your own replacement estimates for comparison. If you don’t know how much it will cost to replace your pool, ask.
- Include inflation. While 2-3% each year seems trivial, over 20+ years this can present a major problem if you have not factored it in.
- Update every 3-5 years. Also, review the study annually, as you may have missed something, life span may have changed, or prices may have shifted.
Implementing Your Community Association Reserve Study Results
Assume the first report you receive will require changes. Review the information, compare the details to your own research, and follow up where there are major differences in lifespan or replacement estimates. Engineers use averages, so as they say on the TV weight loss commercials, your results may vary.
Your Legal Responsibility
I don’t want to scare you, but if “maintaining an adequate reserve fund” is mentioned in your covenants, it is your fiduciary responsibility to ensure that the fund will cover future capital expanses. Ask to see your community association’s reserve study. If there is no current study, commission one. If you can’t convince your fellow board members to commission the study, you probably shouldn’t stay on the board.
As with our own personal financial situations, saving today for a rainy day is much easier than struggling to find the money at the exact time you need it. An adequately funded reserve will ensure that your neighborhood is protected today and into the future.
Neal Bach, CPA