Reserve Studies
Q.I am having a major problem with my association. In the last 5 years we have had three special assessments to cover major repairs. I thought the Board of Directors had to do something called a reserve study to avoid these types of problems. How can we go about avoiding these kinds of unexpected expenses?
A.The answer to your question is very simple. Yes, the board should have an independent reserve study done and see that it is fully funded and periodically updated. Two parts of this statement are important.
The reserve study should be performed by qualified, independent and experienced professionals. By this we mean either architects or engineers who have experience in the reconstruction of properties. It is generally beyond the ability of most boards and managers to perform the necessary detailed inspection and have access to the cost data to do a proper reserve study. There are companies that offer you a check sheet and for a fee will calculate your reserve requirements. This is totally inadequate, because it doesn't adequately address your specific issues based on a forensic examination of the property. Association managers should also not be asked, or expected, to do reserve studies for the same reason.
The study needs to be updated on a periodic basis. Failing to do an update means that the reserve study cannot be relied upon to provide an accurate analysis of funding needs of the association. The Virginia Condominium Act and The Property Owners Association Act both require that the reserve study be done every five (5) years and that an annual review also needs to be done. The Acts do not specify any size requirements for the associations, so regardless of whether your association has 4 units or 400 units, a reserve study is required.
A Reserve Study is the art and science of anticipating, and preparing for major common area repair and replacement expenses by having the common areas inspected and the condition and quantity of the individual parts of the common areas determined. The results allow the board and management to offset the ongoing deterioration of the common areas with funds to ensure the timely repair or replacement of those common areas. When properly done, irregular reserve expenses are offset by ongoing, regular reserve contributions. Special assessments are then left for true emergencies, not expenses that could have been anticipated.
A good reserve study provides:
*An inventory of all items requiring a reserve.
*A condition report on each item in the inventory.
*The cost of replacement for each item in the inventory.
*Recommendations for reducing the cost of repairs or extending the life of an item.
*A financial analysis performed using that information.
*A budget for funding the reserve over a period of years.
*A measure of the Reserve Fund adequacy at this time.
Consequently, it is clear that it requires an experienced professional to produce a quality reserve study. Below we provide a couple of comments from experts in the field:
"The fiduciary responsibility of the Board of Directors then is certain and defined, and it is NOT WORTH THE RISK not to set up adequate funds for the preservation of the project for the community at large."(Richard Wyndamsmith, Reserve Study Guidelines for Community Associations, Planned Developments, Condominiums, 1989)
"The Reserve Study is an excellent tool for evaluating and establishing a stable level of reserve funding. Not only do studies ensure adequate funds for the long-term maintenance of common areas, but they are also a means of fairly distributing the cost of future repairs among all owners."(CAI Research Foundation, Reserve to Preserve, 1991)
If there is any doubt left that every association needs an initial reserve study performed by professionals with updates every 3 to 5 years, just go back and ask yourself: do I have an extra two thousand dollars to spend on replacing the roof or the parking lots in my community on an immediate basis? This is the kind of poor planning that aggravates homeowners and they should be reminded of this fact if they complain about increases in the regular dues in order to adequately fund the reserves and/or pay for the reserve study.
Last year the condo association for my development let their reserves run out, they enacted a special assessment to build those reserves back up.
Is it illegal for the association to let it's reserves run down to zero?
RESPONSE: Scott, Thanks for inquiring. You did not give me much background as to the reason the board spent the reserves. There is a requirement in Virginia statutes to have a reserve study every five years and each year the board must check to be sure that the contributions to reserves are on track. The word "illegal" implies a violation of criminal law. So it would not be "illegal" per se, although running the reserves down to zero could, depending on all the circumstances, give rise to some liability.