Payment for Reserve Study

Hi,

I have a somewhat silly question. How does an HOA properly pay for a reserve study ? Should we have budgeted for that at the beginning of the year in which the study had to be performed ? It would not be proper to pay from, say, general maintenance budget item, right ?

A related question on an irrigation efficiency study. An engineering firm can undertake a study using weather patterns, current heads layout vegetation, water allocation quota and let us know whether we have sufficient irrigation capacity or not. How do we properly pay for a study like that budget-wise ?

Thanks !

Some count the cost of a reserve study to itself be a "reserve component," to be paid for out of the reserve account. This is the way at least two different reserve companies handled this at my former condo. Here's the reasoning: the cost of a reserve study often passes the four part test that is much discussed on the net for "reserve components." Namely, the reserve study:

-- is a financial responsibility of the association, since either statutes, the covenants, or good judgment/fiduciary duty by the board require a reserve study. Said responsibility directly supports proper maintenance of infrastructure.

-- has a limited useful life expectancy. Conventional wisdom is that reserve studies should be updated fully at least every five years. Lately the conventional wisdom is leaning towards also reviewing and adjusting the study annually.

-- has a predictable remaining useful life expectancy.

-- has a cost above the minimum threshold cost set out in the "assumptions" section of the reserve study.

I would say the irrigation efficiency study could potentially be argued to support a reserve component (supporting landscaping longer term needs) and so be paid from reserves. Or it could be argued to be an "operating expense" payable from the operating budget, somewhere under a landscaping line item. I would not sweat where this lands in the accounting. Just do budget it for it.

Ellen, thanks,

I need some piece of mind if we do decide to pay from the reserve for that study. It's not that costly, I am just bothered by the legality of this thing.

While we are on the irrigation system subject.

How do you usually treat irrigation heads replacements? As a maintenance/consumable or a capital replacement item ? Our current reserve study says this:

"HOA should anticipate interim and partial replacements of the system network supply pipes and other components as normal maintenance to maximize the
useful life of the irrigation system. The Association should fund these ongoing seasonal repairs through the operating budget".

Electric valve replacements (one per zone) and controllers are likely in the capital replacement category, but I am not sure about the heads. The board is pushing to pay a for 53 head replacement (not a big cost per se) from the common reserve despite the paragraph above.

Sorry, for the new BOD member questions.

Thanks.

What is the problem? If above the threshold, it's perfectly reasonable to count the cost of the study as a reserve component.

The spending threshold is whatever dollar figure the board in consultation with the reserve study company set. This 0.5% to 1% is said at some sites to be typical. It is not required. Nor is it a "national standard" that is legally binding. Chatter on this range: https://www.reservestudy.com/wp-content/uploads/2018/12/Reserve-Studies-101-Webinar-Outline.pdf

At least you understand why the "0" is present in the "0.5%". [My snark about math illiteracy on the part of others has been deleted.]

I was going to get into legalities of paying for xyz for landscaping from reserves but realize I lacked details.

Your HOA is subject to FS 718, correct?

As you may be aware, Florida statutes regulate the use of reserve funds more heavily than many states. Which is probably a good thing. In the last year or so condos are now required to complete a "structural integrity reserve study" by Dec 31, 2024. Yada yada.

I am going to amend my earlier response. If an "irrigation efficiency study" is not presently in the reserve study, I think it should be listed as a line item under "operating expenses." This is because the use of reserve funds is so regulated in Florida that you all do not want any trouble with owners complaining about violations of the law. Nor should the HOA want to flirt with violations of the law.

You folks in Florida are facing demanding infrastructure and insurance problems. If I may: Try not to get overwhelmed. Recognize that "we are doing the best we can" is often a valid defense if push ever comes to shove and you land in court. Then truly try to do the best you can. If you get outvoted on how to pay for this irrigation study, do not sweat it. Yes it's probably not cool to pay for it from reserves (since it is not presently listed as a reserve component), but I think it's not a hill to die on.

I concur with what ElleN said.

I understand board members may want to do the irrigation study now, but since it hadn't been placed in this year's budget, is there a compelling reason why it can't wait until next year? You might also be able to wait until near the end of this year (after hurricane season) so you'll have a better idea of where the association resources are at.

Assuming your fiscal year begins in January and the board will have to address next year's budget anyway, now's a good time to consider adding a line item to cover studies like this. Your assessments will need to reflect this, but considering everything else Florida is going through regarding HOA reserve studies and insurance, anything you can do to help ensure the prudent use of association funds can help.

PS - although some questions on this website may seem like they should be answered by "Captain Obvious", there really isn't a stupid question, especially if you're new to HOA board business (you'd be surprised how many of the elders don't know the answer either). Never be afraid to speak up - how else will you learn?

FS 720 is not as strict about reserves but still gives owners certain, considerable powers over reserves. Best practices says if one did not play to pay for xyz from reserves, and so xyz is not in the reserve study, then doggone it, do not pay for xyz from reserves.

You folks are budgeting and have not actually had this irrigation flow study done. This is a good thing, at least.

You want to look at costs //in the aggregate//. In the aggregate, they can cost a lot. And for funding (from operating accounts or reserves), the aggregate is what boards should consider. But there are other criteria. Let me urge applying the four-part test (or from the net, a variation of the four-part test). To be a reserve component, the item has to be:

-- a common area maintenance responsibility of the HOA, or directly supporting same.

-- life limited, meaning it has a limited life which one can reasonably estimate

-- that it have a predictable remaining useful life

-- in the aggregate as appropriate, have a cost above a certain threshold.

See https://www.caionline.org/LearningCenter/credentials/Documents/NRSSClarificationArticles.pdf

My former 2000 home HOA did not have a reserve fund, since the only responsibility was maintaining front yards. It did fine just budgeting for sprinkler heads out of operating accounts. The yearly data was invaluable for planning.

Sprinkler heads break for all manner of reasons, and not just being at "the end of life."

Five will get you ten here. I would budget from the operating account for sprinkler heads.

Backflow preventers are another story. How many does this HOA have? Are they industrial size? Where I was, the things break all the time. Full replacement after a couple of years seems not uncommon. What do they cost these days? If they are not already in the reserve study, they perhaps should be.

Again do not sweat this too much. Vote your conscience. But just as long as these items appear in the budget (operating or reserves) somewhere, good enough.

Ellen,

We use "reclaimed" water (pink pipes) so we do not have backflow preventerd since water is not drinkable anyway. Just one big pipe at the entrance, with a central valve, distributed over the community into a couple hundred zones operated with electric valves and controllers.

Your reserve study should be paid for out of your operating budget. The "National Standards for Reserve Studies," which EVERYone interested in this topic should read, shows that the components listed in a study must be common area physical items that'll eventually need repair or replacement. Here's how our reserve provider states it in our 2023 reserve study, cover page:

Component List. "Unique to each property, the Component List serves as the foundation of the Reserve Study and details the scope and schedule of all necessary repairs & replacements."

While I agree a reserve study IS a "financial responsibility," of the the HOA ,many, many items in the operating budget also are, and they most certainly are not in the reserve study

Moreover, many HOAs have studies done every year. Components that last a year or less aren't in reserve studies. Our HOA buys a 3-year package. For a "full-study," the reserve provider tours the premises with the PM, engineer if the HOA has one, or board member(s). The specialist examines the covenants to make sure their recommendations don't conflict. The 2nd and 3rd year studies are less extensive with the latter, for instance just involving the PM informing the specialist of the reserves study components that were repaired/replaced over a one-year period. The specialist then "resets" the study accordingly whereby certain components now have longer remaining useful lives. A full-study is more expensive, of course.

Do you have a Contingency line item in your operating budget, VC? If so, that could be the source of funds for the study. You mentioned you have an existing reserve study. How old is it? If less than 3 y.o., the provider your HOA used, may give you a discount for a 2nd or 3rd year study.

Your reserve specialist is succinct and on target when s/he wrote: "HOA[s] should anticipate interim and partial replacements of the system network supply pipes and other components as normal maintenance.... The Association should fund these ongoing seasonal repairs through the operating budget." These type-- the heads-- of ordinary maintenance expenditures are funded from your operating budget. Perhaps from your landscaping budget, which might comprise a few line items. Or from a "plumbing" line item. Otherwise, from Contingency.

So with Cathy (I think?) and Shelia, both studies should be in your operating budget. I agree with Sheila, too, that the irrigation study can wait until your next fiscal year so that it can, correctly, be a line item in your operating budget. How much would this cost, anyway?? Still, VC, as a newer member of your Board, if you really want to serve your community well, it's wise to not push hard on the Board to do things the "right" way. You do want to get along with a majority of the Board.

But many HOAs are very careful not to steal from reserves to pay for sudden whims, or even fresh great ideas, that should be funded by the operating budget. Matters do emerge during a year, which is why our HOA has a fairly healthy Contingency line item (too healthy in my opinion!).

Say, VC, how many dwellings are in your HOA? How many board members? You've asked really good questions. The vast majority of HOA owners do not understand reserves, and based on my 14 years as a hyper-active board member, who worked closely with our reserves specialist on our complex HOA's multiple studies for many years, the majority of board members in my HOA do not comprehend our reserves accounts either.

The above is so misleading and utterly erroneous.

The Community Association's Institute (CAI) publishes what //it// calls the "National Reserve Study Standards."

The International Capital Budgeting Institute (ICBI) also publishes "standards."

The CAI's standards have no legal authority whatsoever.

This company flatly asserts that it feels the CAI standards (to which Kerry keeps referring) are not sufficient:

https://facilitiesadvisorsllc.com/resources/standards

Reserve studies support and are intimately involved with infrastructure. The "life" of a reserve study is as estimable as any reserve component's life, with the frequency often regulated by law as well. In the states that //require// a reserve study, and since such studies lose validity over the years, of course the study itself is rightly included as a reserve component, if the HOA desires.

The Davis-Stirling site comments that insurance deductibles do not meet the definition of a reserve component, but observes, "Even so, the reserve fund appears to be the better place for insurance deductibles--it allows funding over 2 or 3 years and avoids annual budget surpluses." See https://www.davis-stirling.com/HOME/I/Insurance-Deductible .

Nowhere does it say that reserve components must be exclusively "physical items." Obviously for a HOA, they are mostly going to be physical items. But there is no reason the cost of a reserve study, insurance deductible or whatever, that is tied to the support of physical infrastructure, cannot be included in a reserve study. Where the expense is large enough, predictable enough (time-wise), and is not paid annually, it makes complete sense to include the expense in a reserve study, so the cost is spread over as many owners over the life of the HOA as possible. Basic math.

Your HOA has to pump water from lakes for most (or all) of your irrigation? And the system shares boundaries yada with drinking water systems, so the system by law has to have backflow preventers?

Where I was, temperatures could go below freezing often in winter. This greatly aggravated the break-age rate of the BFPs. I would have thought Florida might be better.

I moved to a condo with just a half dozen industrial size BFPs. The BFPs were the same headache.

I think the engineering of these devices is just lousy.

I would complain about over-regulation by the government, but this does not help. I know it's a reality that there have been some terrible accidents caused by foul or poisoned water getting into a drinking system.

That's not what it is called.
The OP is not in California.

They say nothing of the sort. D-S says: ""Even so, the reserve fund appears to be the better place for insurance deductibles--it allows funding over 2 or 3 years and avoids annual budget surpluses."

I do not object to a HOA paying for a reserve study from the operating account or the reserve account (as long as the cost of the reserve study is listed as a reserve component). Neither does the D-S law firm. Take your complaining to them.