By its very nature, a well done Reserve Study requires a coordinated team effort consisting of three parties: the Reserve Study professional, management, and the Board. As a Reserve Study professional, to do our part of the job well, we need to ask questions of the other two parties. The result is a better, more accurate Reserve Study. Client involvement (Board or management) is essential so we can find out when the roof was last replaced, how much the new hallway carpet cost, how many months per year the pool is used, etc. We ask a lot of questions, and by nature we sift through what we hear.

Examples of comments we may not use are: “We don’t plan to replace the carpet for two more years”, or “We’ll just wait until we see deck problems and special assess at that time”, “Don’t you just hate the color of the wood trim”, “The Board needs their Reserve contributions to drop a bit to meet their election promises”, etc.  We apply our experience, expertise, and National Reserve Study Standards to give the association what they paid for – an independent evaluation of their physical assets, the strength of their Reserve Fund, and a recommended Reserve Funding Plan.

Our logo appears on the cover, so we control the content of the report. We value your input. But just because we’re listening doesn’t mean we will incorporate all your suggestions and lose our independence. There’s an important difference between researching, and being influenced. Count on an independent Reserve Study professional to respectfully ignore your suggestions or recommendations that do not in their opinion reflect the true physical or financial situation at the property.

So if we don’t incorporate all your suggestions about when projects should happen, how much things should cost, which components should (or should not) appear in the Reserve Study, or where you’d like to see the Reserve contributions go (up or down), don’t take it personally. We’re just doing our job of giving you the independent expert opinion you paid for!

First, we received a request from a manager asking or us to indemnify her, the association, and her management company for their (state-required) California Reserve Disclosure Form. Not a problem, because this is something we do (free) as part of our Reserve Study preparation service. But the problem was on her list of requirements: that we just give her the (almost blank) form, and let her fill it out. How are we to take responsibility for something we didn’t do?

We are doing a with-site-visit update to a prior company’s Reserve Study for a Washington property. In reviewing the prior Reserve Study, prepared by their in-house management staff, there are calculation problems and conceptual mistakes (presuming A and B, but resulting in D, not C). It was their own in-house Reserve Study product, and it showed. It did not use National Reserve Study Standard terms, and it did not use National Reserve Study Standard concepts. The funding recommendation was misleading. We are going to have to do some significant and tactful explaining to the board and management to convey the differences between our product and their (inferior, misleading) product last year, without embarrassing the management company too much.

Finally, a prospect with a proposal request offered up a question that had been bugging him since last year – he had never been able to understand his (state-required) California Reserve Disclosure Form. For non-California readers, this is supposed to be a simple one-page form that summarizes, in clear terms, the status of the Reserve Fund and the implications of the Board-chosen Reserve Funding plan (which by the way, is often not the Reserve Funding plan recommended in their Reserve Study). The issue had to do with calculations. The management company had made up its own definition for 100% Funded, defining it as “when there is cash in the Reserve Fund, they’ve 100% met their objective to have cash in the Reserve Fund”. That is so wrong. Percent Funded is defined in National Reserve Study Standards (see http://www.reservestudy.com/the-learning-center). So in preparing the disclosure form in-house, incorrectly, they’ve taken a simple disclosure process and successfully flipped it on its head – confusing and misrepresenting the situation to the homeowners!

Frustrating!

As we should do when confronted with a dilemma, we need to go back to basics. There are two purposes of a Reserve Study – to provide budget direction to the Board of directors and management, and to disclose the current physical status of their Reserve components and the financial status of their Reserve Fund.

It is one thing for the Board to not follow our Reserve contribution recommendation. Indeed, it is only a recommendation. The Board is free to run the property in the manner they see fit, and we would never revise a Reserve Study to match their (often ill-advised) Reserve funding decisions. If we do that, it is no longer our recommendation! But it is a totally different issue for a board to suggest the Reserve Study should be changed on an issue having to do with physical or financial reality.

If the ironwork needs to be painted (the surface is chipping, peeling, or rusting), and failure to repaint at this time will cause deterioration of the fence itself, we will not back off and revise the Reserve Study to “go along” with the board’s plans to delay ironwork repainting. The same would be the case with a rec rm that is old and tired, with leftover/mismatched furniture, stains on the carpet, scuffed and stained walls, a pool table with torn felt, etc. While future costs will not increase if the refurbish project is deferred, our independent, professional opinion (which the client paid for us to give!) is that the room needs to be refurbished at this time. And finally, if the association informs us that it “hopes” to get a lump sum payment from a delinquent owner in the next 30 days which will be deposited into the Reserve Fund, should we revise the starting balance? No, as it is still wishful thinking at this time.

It would be a failure of our responsibility to the client if we were to ignore reality and push back a project, eliminate a project, or revise some financial figures because of a Board opinion. A Reserve Study is no place for wishful thinking or distorted reality. Whether prepared by an independent, credentialed professional or not, the Board, current homeowners, and prospective homeowners should find an accurate disclosure of the physical status of their Reserve components and the financial status of their Reserve Fund in their Reserve Study.

On the surface, that seems very fair and reasonable. Who wants to pay for something that they won’t benefit from? That certainly sounds like someone else’s problem!

But upon examination it reveals faulty thinking about Reserve contributions – and I challenge you to be willing to change your view on the subject. Reserve contributions are not for future expenses. Reserve contributions offset the cost of current, ongoing deterioration! Let me lay it out for you. Suppose the association has a roof expected to last 20 yrs that costs $100,000. Roughly speaking, the roof is deteriorating at the rate of $5000/yr ($100,000/20 yrs). Those enjoying the use of the roof should pay their fair share of that deterioration, along the way. It’s only fair. Current owners are the ones using it while it is deteriorating. It’s absurd to expect someone else to pay for something you used up!

Reserve expenses are not like a game of musical chairs, where it is just a matter of (bad) luck to be one of the owners at the time a large expenditure occurs. Your Reserve assets are deteriorating in a very slow, predictable manner over the course of many years. Set your association up with appropriately sized Reserve contributions so that all owners are paying their fair share along the way. If you do that, when the “balloon payment” for that gradually growing obligation occurs, everyone who “used up” that component will have paid their fair share. It is crazy for a homeowner to think they are not responsible to pay their fair share of current, ongoing deterioration at the association!

The Straight Line (“Component”) method of funding Reserves is based on summing together individual pieces…  summing together the individual contributions required by each component. So the total Reserve contribution, and total Reserve Fund, can then be broken back down into those individual pieces (if one wishes). So one could identify “Roof Reserves” if the Reserve Study was prepared based on the Straight Line method.

On the other hand, in a “Cash Flow” (or “Pooled”) Reserve Funding methodology there is no such thing as contributions made towards an individual component. By extension, there is no such thing as a portion of the total Reserve Fund dedicated towards any particular component. This is because in such a methodology, total income to Reserves is balanced against annual total expenditures from Reserves without concern for if that annual expenditure was one or 50 projects. In such an analysis, Reserve cash flow is blind to individual projects. Unrestricting the cash in this manner is the most efficient use of Reserve Funds, allowing them to “flow” from one component to another as needed, which is one of the advantages of the Cash Flow method. The Cash Flow method is not inherently more or less risky than the Straight Line method. It is just different. Thus in a Reserve Study prepared by the Cash Flow method, there is no such thing as “Roof Reserves” or “Asphalt Reserves”, as the Reserve cash simply goes where it needs to go, it is not designated towards a specific project.

So an answer to the question depends on the methodology used in preparing the analysis. But let me suggest that the answer doesn’t matter. Even when using the straight line method, it is common that the Reserve Study professional, or the software used by the preparer, will re-allocate or re-balance both the existing funds allocated towards a component, and the contributions from that point forward added to that component. Both are essentially insignificant. If it is found that the Roof project will be more expensive than anticipated, it is typical that funds will be re-allocated towards roofing from other components. This is what the “Cash Flow” method does on an ongoing basis.

So the amount in the “Roof Reserves” shouldn’t matter. What matters is if the Funding Plan provides for the timely repair and replacement of scheduled Reserve projects. Focus on the big picture, not on numbers that are somewhat arbitrary from year to year!

First, National Reserve Study Standards (NRSS) requires a minimum display of 20 yrs of income and expenses in a Reserve Study. So any discussion of length of a Reserve Study projection starts with 20 years (not just 10 or 15).

California Civil Code, where our firm has five offices, requires that a Reserve Study include and display all Reserve components with a Remaining Useful Life less than 30 yrs. So we developed our basic format to display an even 30 yrs.

It is important to understand that some of an association’s largest Reserve expenses, like major mechanical components and roofing systems, have life expectancies in the 20-30-yr range. Those components meet the NRSS definition of assets to be funded through Reserves (common area maintenance responsibility, limited Useful Life , predictable Remaining Useful Life, and above a minimum threshold cost of significance). I may not predict accurately if it will fail in 25 years or 21 years (or 30 years), but it will fail, and when it does, it will be a big expense. It is worth preparing for at this time.

It is important to note that since we use Percent Funded as a target for our funding plans, even if an expense is off the horizon of our 30-yr display, the Percent Funded target for that component exists every year, even in the 30th yr. This means that a component with a 40 yr Useful Life and a 35 yr Remaining Useful Life is still being funded with our software, even though no expenditure actually displays in our 30-yr Reserve Study report. Some people mistakenly think, perhaps trying to keep their Reserve contributions low, that if the expenditure doesn’t appear in the x-yr “window of opportunity” considered in the Reserve Study, it will not be funded (it will not require Reserve contributions). That is true if you are funding Reserves on a cash basis, against anticipated expenses, but incorrect when using a Percent Funded target. In that same 40-yr Useful Life component with 35-yrs Remaining Useful Life, in the initial year the Reserve “obligation” (target) is 1/35th of the current replacement cost. Similarly, 30 years from now we can project that the Reserve obligation will be 30/35ths of the projected cost at that time. We know that now, even though the actual expense is (at this time) projected to be five years outside the 30-yr window.

Just thought you would like to know!

But all will get the same answer. Insurance deductibles are inappropriate for Reserve designation because they fail test #3 of the National Reserve Study Standard four-part test for Reserve Components… that the expenditure’s timing must be predictable. An insurable loss by definition is unpredictable. That’s why you insure for it!

When you don’t know when the expense will occur, it becomes a guess, not something you can “plan” for in advance. So insurance deductibles are best handled through means other than a Reserve Component. While the Reserve Fund may play a role, (the association may use a short term loan from Reserves to pay the deductible while the association passes a special assessment to reimburse the Reserve Fund, etc.), it inappropriate to have a Reserve line item (component) for insurance deductibles.

The 2010 American Disabilities Act (ADA) guidelines for the Accessible Design for Recreation Facilities were revised and signed into law on September 15, 2010. This Act applies to all private and public facilities that are a place of ”public accommodation”. So the first question is whether your association’s pool area is used only by members and their invited guests, or if it is open for use by members of the general public (community events, outside weddings, Boy Scouts and Girl Scouts, etc.).

If your pool area is a place of public accommodation, the question then moves to when this requirement applies. Obviously, it applies for new construction. But what is an “alteration”? Will installation of a lift be triggered the next time you make any change to your pool or spa (a new heater, filter, pump, or resurface project)? It appears the answer is no… an alteration has to do with a change to the accessibility of the asset. A new heater or a resurface project can be interpreted as “maintenance” of an existing asset. On the other hand, replacing the pool deck and related stairs and gates is an alteration of the area, which would trigger a requirement to comply with the higher 2010 ADA standards.

Bottom line: the 2010 ADA standards do not apply to most residential community associations. Please consult legal counsel for specific guidance on this matter.

It is easy to understand when you consider furniture in a recreation room. The assets are a matched set, with complementary styling and age. They all share the same purpose, Useful Life, and Remaining Useful Life. It would not be appropriate to replace the tables and chairs, but not the couch (with the same trim). For aesthetics, it is best to replace all at once. The same principle applies for assets within timeshares… it is best for consistency of appearance between rooms, and within an individual room, to not memorialize exceptions by tracking individual assets separately (now on different life cycles) in the Reserve Study. It is best to replace all at once for a consistent, purposeful aesthetic.

With mechanical assets, the principle is the same. A fleet of mowers tends to age, and rather than track which ones are new and which ones are old, stocking multiple sets of replacement parts, continuing to squeeze a few more months of life out of an old unit, in many instances it is best to simply get a new fleet. Management time is saved, and maintenance time is saved.

Remember, a Reserve Study is a budget planning tool, not an asset management inventory. The additional # of Reserve Component line items found when individual assets are listed often detracts from the recommended concept of replacing an entire category of asset at the same time. It is not a matter of your Reserve Study provider taking a shortcut. A Reserve Study helps you cost-effectively maintain the assets of the corporation, maximizing appearances and minimizing management and maintenance overhead. Assets with similar purpose, with identical Useful Life and Remaining Useful Lives, are often appropriate for being “grouped”, or “lumped” together.

Folks, that’s faulty thinking. The money in Reserves got there because boardmembers in prior years put it there to offset ongoing deterioration at the association. While the actual expenses from Reserves occur rarely, deterioration is ongoing, every day. The design of a successful Reserve Funding Plan is to set aside Reserves at the rate your assets are deteriorating. In this way, your Reserve Fund will be ready to handle the expense when it comes due.

If you regularly under-contribute to Reserves, supplementing with funds “left over” in the Reserves from prior years, what you are really doing is spending money that has been set aside for other purposes. It is very similar to going on a diet. Dieting is fundamentally taking in (eating) less calories than your body burns. You lose weight when your body is burning its Reserves.

So in this new year, when many people resolve to go on a diet and lose those 5 or 10 pounds they picked up over the last year, make sure your Reserves are not on a diet. Make sure you are sustainably putting enough cash into Reserves. Don’t use up the Reserve cash so sacrificially put there by prior owners!