Reserve Study

DavidG45 (Delaware)
Posts: 994

Posted:

Our new community just opened a reserve fund this year. Our PM chose the amount, though no official Reserve Study was performed. I think we probably should conduct a Reserve Study, but another property manager said something that gave me pause. They said if we conduct a formal reserve study, the Board can be legally bound to fund reserves based on that study. If the study is way too high, we would not have the flexibility to adjust it based on our own assumptions. They said it would be better to conduct an informal reserves needs analysis, which we could use to inform our decisions, but to which we would not be forced to adhere.

Has anyone heard of this opinion before? Thoughts?

AugustinD
Posts: 3,698

Posted:

Quote:

Posted By DavidG45 on 05/04/2022 6:14 AM
Our new community just opened a reserve fund this year. Our PM chose the amount, though no official Reserve Study was performed. I think we probably should conduct a Reserve Study, but another property manager said something that gave me pause. They said if we conduct a formal reserve study, the Board can be legally bound to fund reserves based on that study. If the study is way too high, we would not have the flexibility to adjust it based on our own assumptions. They said it would be better to conduct an informal reserves needs analysis, which we could use to inform our decisions, but to which we would not be forced to adhere.

-- After reviewing the relevant statute, my thoughts are that this other property manager likes to pretend he/she knows what he/she is talking about.

-- The Delaware Uniform Common Interest Ownership Act has a lot to say about reserve studies. The UCIOA demands much more from condominium associations than subdivision-type HOAs. I see nothing in the UCIOA that resembles what this manager says.

-- Boards ask reserve study companies to fine tune either the estimated remaining life, the estimated cost to replace, or both all the time. If the request is reasonable, the reserve study will be more than happy to make changes. If you do not believe this, call a few reserve study companies and ask this simple question.

-- Keyword search the UCIOA for "reserve" to start getting educated on the statutory requirements. See
https://delcode.delaware.gov/title25/c081/index.html

-- I think a good fraction of HOAs/COAs do not understand reserve studies and how the board can fine tune most any of the study's numbers that the Board thinks is wrong. Consequently I think many Boards tend to ignore reserve studies.

SheliaH (Indiana)
Posts: 6,964

Posted:

Does that property manager work for your community? Did he/she give you any legal citation stating this is a requirement? If not, ignore him/her and do what's best for YOUR community.

You could do an informal study, but is there anyone on the new board or in the community who knows what they are and are willing to do the work? This isn't the type of thing is jump into unless I had some idea as to what they entail. I'm not aware of any law that requires an HOA board to follow a reserve study - the funding recommendations care just that, so the board has to do its homework, ask as many questions as necessary and then make a decision. You can always adjust the amount of fundinf, but the key is to get the reserve fund started and to fund it regularly - must we remind you of Surfside?

(and why didn't you ask your association attorney about your legal obligations anyway?)

Thus, you've learned the first rule regarding property managers - they work for the association, not the other way around. It's ok for them to offer suggestions, but the good ones understand they must then let the board make the decision and his/her job after that is to make it work. If he/she has ethical or legal concerns regarding the board's instructions, they should say so and consult their supervisor, if applicable, their own attorney, or let the association attorney hash it out.

If it is not right do not do it; if it is not true do not say it. Marcus Aurelius

MichaelT21 (Arkansas)
Posts: 501

Posted:

Quote:

Posted By DavidG45 on 05/04/2022 6:14 AM
Our new community just opened a reserve fund this year. Our PM chose the amount, though no official Reserve Study was performed. I think we probably should conduct a Reserve Study, but another property manager said something that gave me pause. They said if we conduct a formal reserve study, the Board can be legally bound to fund reserves based on that study. If the study is way too high, we would not have the flexibility to adjust it based on our own assumptions. They said it would be better to conduct an informal reserves needs analysis, which we could use to inform our decisions, but to which we would not be forced to adhere.

Has anyone heard of this opinion before? Thoughts?

In my state (Washington), we are required to conduct a reserve study and notify the homeowners of how well funded we are each year, but we are not required to fund it well or even fund it at all.

I would recommend getting a reserve study done.

DavidG45 (Delaware)
Posts: 994

Posted:

Quote:

Posted By AugustinD on 05/04/2022 6:44 AM

Posted By DavidG45 on 05/04/2022 6:14 AM
Our new community just opened a reserve fund this year. Our PM chose the amount, though no official Reserve Study was performed. I think we probably should conduct a Reserve Study, but another property manager said something that gave me pause. They said if we conduct a formal reserve study, the Board can be legally bound to fund reserves based on that study. If the study is way too high, we would not have the flexibility to adjust it based on our own assumptions. They said it would be better to conduct an informal reserves needs analysis, which we could use to inform our decisions, but to which we would not be forced to adhere.

-- After reviewing the relevant statute, my thoughts are that this other property manager likes to pretend he/she knows what he/she is talking about.

-- The Delaware Uniform Common Interest Ownership Act has a lot to say about reserve studies. The UCIOA demands much more from condominium associations than subdivision-type HOAs. I see nothing in the UCIOA that resembles what this manager says.

-- Boards ask reserve study companies to fine tune either the estimated remaining life, the estimated cost to replace, or both all the time. If the request is reasonable, the reserve study will be more than happy to make changes. If you do not believe this, call a few reserve study companies and ask this simple question.

-- Keyword search the UCIOA for "reserve" to start getting educated on the statutory requirements. See
https://delcode.delaware.gov/title25/c081/index.html

-- I think a good fraction of HOAs/COAs do not understand reserve studies and how the board can fine tune most any of the study's numbers that the Board thinks is wrong. Consequently I think many Boards tend to ignore reserve studies.

Thanks. I will need to research this quite a bit to get a handle on it.

KerryL1 (California)
Posts: 14,550

Posted:

I agree with Michael's advice. CA, requires a study every three years , but we're not required to fund it.

BarbaraT1 (Texas)
Posts: 821

Posted:

Don't see any issue with the PM choosing the initial deposit. The board can change that number if they want to.

The argument behind not getting a study is one developers use to wait until transition to do a study. Sure there's a risk someone could sue you for not funding it to the recommended level. There's also a risk someone could sue you for not getting one at all. Anybody can sue anybody for anything. Operating from a place of fear over a potential lawsuit is immobilizing.

A reserve study is a tool. If your reserve study says the expected useful life of your playground is 20 years and 20 years later you inspect it and it's fine, you don't have to rip it out and replace it just because the study said so.

MaxB4
Posts: 3,513

Posted:

Quote:

Posted By KerryL1 on 05/04/2022 9:31 AM
I agree with Michael's advice. CA, requires a study every three years , but we're not required to fund it.

BUT, you are required to inform the members annually how well funded the reserves are.

KerryL1 (California)
Posts: 14,550

Posted:

Yes, of course, Max.

BTW, Our developer and I've heard that other developers do contract for a reserve study before turnover. Savvy buyers want to know something about the reserves strength. In our case, the developer's "study" underestimated the replacement cost and overestimated the useful life of numerous components. This kept dues lower to help them sell their product.

MaxB4
Posts: 3,513

Posted:

Communities need to review their reserves studies on an annual basis. Many, if not most, reserve studies aren't worth the paper they are written. Why, because of this "pandemic", labor costs have escalated as well as a huge surge in material costs.

NpB (Arizona)
Posts: 605

Posted:

Quote:

Posted By MaxB4 on 05/04/2022 12:55 PM
Communities need to review their reserves studies on an annual basis. Many, if not most, reserve studies aren't worth the paper they are written. Why, because of this "pandemic", labor costs have escalated as well as a huge surge in material costs.

I disagree. A reserve study is a very valuable financial planning tool for an HOA. One would reasonably assume credentialed reserve analysts with a finance background would take into account inflation and know current and anticipated future costs for components.

MaxB4
Posts: 3,513

Posted:

Quote:

Posted By NpB on 05/04/2022 1:18 PM

Posted By MaxB4 on 05/04/2022 12:55 PM
Communities need to review their reserves studies on an annual basis. Many, if not most, reserve studies aren't worth the paper they are written. Why, because of this "pandemic", labor costs have escalated as well as a huge surge in material costs.

I disagree. A reserve study is a very valuable financial planning tool for an HOA. One would reasonably assume credentialed reserve analysts with a finance background would take into account inflation and know current and anticipated future costs for components.

If you say so, but Michael from Washington might disagree with you.

SteveH35 (Washington)
Posts: 339

Posted:

Quote:

Posted By DavidG45 on 05/04/2022 6:14 AM
Our new community just opened a reserve fund this year. Our PM chose the amount, though no official Reserve Study was performed. I think we probably should conduct a Reserve Study, but another property manager said something that gave me pause. They said if we conduct a formal reserve study, the Board can be legally bound to fund reserves based on that study. If the study is way too high, we would not have the flexibility to adjust it based on our own assumptions. They said it would be better to conduct an informal reserves needs analysis, which we could use to inform our decisions, but to which we would not be forced to adhere.

Has anyone heard of this opinion before? Thoughts?

David,

All I will add to this discussion is that what you are *legally required to do* and what's *reasonable* are conceptually similar, yet legally different. While volunteer Directors are legally bound to, at minimum, a duty of care or fiduciary duty in almost every state, the requirement for reasonable decision-making, when tested legally, does not match common sense (just as the law does not always seem to match common sense). Regardless of your state statutes, experience has taught us that every CIC *should* have a reserve study, *should* take reasonable action to fund reserves and *should* be proactive and avoid squabbling over reasonable expenses that relate to infrastructure, safety and habitability of multi-family residential property and common interest components.

Here's a page full of references I think you'll benefit from reviewing: https://www.(LINK-NOT-ALLOWED-PER-POSTING-RULES)/resources/reserves.

Regards,
Steve

MichaelT21 (Arkansas)
Posts: 501

Posted:

Quote:

Posted By NpB on 05/04/2022 1:18 PM

Posted By MaxB4 on 05/04/2022 12:55 PM
Communities need to review their reserves studies on an annual basis. Many, if not most, reserve studies aren't worth the paper they are written. Why, because of this "pandemic", labor costs have escalated as well as a huge surge in material costs.

I disagree. A reserve study is a very valuable financial planning tool for an HOA. One would reasonably assume credentialed reserve analysts with a finance background would take into account inflation and know current and anticipated future costs for components.

Yes, I disagree with this. Our reserve study, created by a national reserve study firm that has offices all over the country, has majorly flubbed up on our reserve study. The cost of replacement in the study is about 1/2, on average, of the cost of the actual replacement. We are currently going through item by item, getting quotes, sending the quotes to the reserve study firm, and asking for them to update the study.

The result is we are going from a well funded association, per the reserves study, to a poorly funded association even though we generally are not using reserve money for stuff. This makes us look bad but we try our best to explain it. Reserve studies are not cocktail party conversations though so it's a bit hard.

SteveH35 (Washington)
Posts: 339

Posted:

Quote:

Posted By MichaelT21 on 05/09/2022 1:10 PM

Posted By NpB on 05/04/2022 1:18 PM

Posted By MaxB4 on 05/04/2022 12:55 PM
Communities need to review their reserves studies on an annual basis. Many, if not most, reserve studies aren't worth the paper they are written. Why, because of this "pandemic", labor costs have escalated as well as a huge surge in material costs.

I disagree. A reserve study is a very valuable financial planning tool for an HOA. One would reasonably assume credentialed reserve analysts with a finance background would take into account inflation and know current and anticipated future costs for components.

Yes, I disagree with this. Our reserve study, created by a national reserve study firm that has offices all over the country, has majorly flubbed up on our reserve study. The cost of replacement in the study is about 1/2, on average, of the cost of the actual replacement. We are currently going through item by item, getting quotes, sending the quotes to the reserve study firm, and asking for them to update the study.

The result is we are going from a well funded association, per the reserves study, to a poorly funded association even though we generally are not using reserve money for stuff. This makes us look bad but we try our best to explain it. Reserve studies are not cocktail party conversations though so it's a bit hard.

Michael,

What you and others describe in terms of lackluster reserve studies is extraordinarily common. Why? For at least TWO reasons:

1) States like Washington require reserve studies, but statutorily exclude reserve study vendors and volunteer directors from legal exposure to poorly executed, poorly researched and/or inaccurate reserve study documentation. These portions of the statutes were designed by industry forces without the best interests of CICs in mind.
2) there's a common misunderstanding about the necessity of "managing the vendor" and "managing the manager" that is true across the known universe of services delivered by human beings. Volunteers need to be involved. There's a picture of how volunteer involvement tangibly changes reserve study results on this page: https://www.(LINK-NOT-ALLOWED-PER-POSTING-RULES)/resources/reserves.

Regards,
Steve

JohnC46 (South Carolina)
Posts: 14,265

Posted:

Quote:

Posted By MichaelT21 on 05/09/2022 1:10 PM

Posted By NpB on 05/04/2022 1:18 PM

Posted By MaxB4 on 05/04/2022 12:55 PM
Communities need to review their reserves studies on an annual basis. Many, if not most, reserve studies aren't worth the paper they are written. Why, because of this "pandemic", labor costs have escalated as well as a huge surge in material costs.

I disagree. A reserve study is a very valuable financial planning tool for an HOA. One would reasonably assume credentialed reserve analysts with a finance background would take into account inflation and know current and anticipated future costs for components.

Yes, I disagree with this. Our reserve study, created by a national reserve study firm that has offices all over the country, has majorly flubbed up on our reserve study. The cost of replacement in the study is about 1/2, on average, of the cost of the actual replacement. We are currently going through item by item, getting quotes, sending the quotes to the reserve study firm, and asking for them to update the study.

The result is we are going from a well funded association, per the reserves study, to a poorly funded association even though we generally are not using reserve money for stuff. This makes us look bad but we try our best to explain it. Reserve studies are not cocktail party conversations though so it's a bit hard.

Michael

At least you have a Reserve Study for a road map to go by. Many do not even have that, never mind cost. Also cost can very quite a bit. As an example. My HOA is responsible for replacing roofs on our duplexes and single family home. 82 structures. 40 duplexes and 32 singles thus 112 owners. It will be done over 7 years as that is the time from the first home build to the last. In pricing things out, more then one company said if we committed to them to do the entire project they could cut the price quite a bit. Though no actual price cut was mentioned, 25% was bantered about.