Finances are a crucial and challenging part of running a condo association. You need to ensure you have enough association reserves and proper budgeting for all present and future expenses. We interviewed Kevin Bobb and Mike McDevitt of Building Reserves to find out how to manage association reserves, and why reserve studies, and reserve study specialists, are so crucial. Any property with commonly-owned assets, such as pools, lakes, clubhouses, common hallways, roofs, and mechanics should receive regular reserve studies.
What is the purpose of a reserve study?
The two main reasons to conduct a reserve study are
- To spread the cost of all future capital repairs and replacements to all past, current, and future association unit owners.
- To help the condo association avoid special assessments and bank loans.
The study enables you to budget in appropriate contributions, assuring that owners will be paying for their portion of the commonly-owned assets.
When to get a reserve study for a condo association
Reserve studies should begin as soon as a property is turned over to association control from developer control. This transition typically occurs once the developer has sold more than 51% of the units. Associations should update their reserve study every three to five years thereafter, unless there are a lot of large macroeconomic changes (e.g., inflation changes), or major financial or physical changes to the property. In this case, update sooner than the three to five years.
Failing to do reserve studies according at that cadence could result in:
- budgeting being way off because it didn’t account for inflation
- unknown condition changes or unexpected failures
- items not being taken care of in a timely manner
- overall higher repair/replacement costs
Choosing among reserve study specialists
Reserve study specialists are the individuals who conduct reserve studies. A study is only as good as the data it contains. So, if you hire an unqualified engineer for your study, and (s)he fails to anticipate, observe, or record something, you can never make it up in the process. A failure in projections can lead to under-funding or over-funding, and all the issues associated with that.
Qualifying your specialists
So, it is important to ensure you choose a company whose engineers are credentialed at the nationwide standard: CAI’s Reserve Specialist designation. The person inspecting the property should have an engineering or architecture Bachelor’s or Master’s degree from a credible institution. Reserve studies are a specific art and science.. As such, the firm should have senior staff that has been conducting reserve studies for at least 7 years. At Building Reserves, while it is not required, they also staff PEs (state-licensed Professional Engineers) and licensed drone operators. For comparison, all their engineers have at least 10 years of experience conducting reserve studies.
What to watch out for
Engineering firms that do not specialize in reserve studies generally do not produce the same high quality results as a firm who does. Some reserve study companies outsource the work to subcontractors. With this route, your report may be missing important projections, as it is possible the inspector is unqualified. Consequently, you will have a more difficult time holding them accountable. Also, the people inspecting the property should be the ones compiling the reserve study report.
Your association board should take a look at a sample reserve study from the firm(s) you are considering, and ensure it is something easily understandable that you can use. Many reserve studies are over-complicated, convoluted, and difficult to understand, even for other reserve study providers. Obviously, this defeats the purpose. Get your reserve study in both PDF and Excel formats.
Finally, the firm you choose should back up their work for six months and provide two sets of free revisions during that six-month time frame. Confirm they have quality control standards in place, such as a group peer review of each study before they submit the first draft to the client.