Why Perform a Reserve Study?

By: Robert M. Nordlund, P.E.

First and foremost, all physical assets deteriorate with time. Deterioration is not just possible or probable, it is inevitable. The Governing Documents of most associations require the Board to collect an "appropriate" amount of money on a regular basis to offset the ongoing deterioration of the common areas. Most of the "major" components which the association is responsible to maintain will require replacement in a predictable manner. Therefore it is possible to prepare well in advance for these inevitable expenses, spreading out the contributions evenly over time (in a sound, businesslike manner), rather than special assessing one unlucky set of owners at one particular point in time. It is irresponsible to create a financial emergency (special assessment) which could have been avoided by advance planing.

If advance planning is not done, major expenditures too large to be absorbed by the operating budget will hit the association like a wrecking ball. If the associa-tion cannot collect the funds in a timely manner, the bills only get larger due to deferred maintenance. The association, physically and financially, begins to deteriorate as if a wrecking ball had indeed hit.

As corporate officers, Boardmembers have been entrusted by the owners with the care of association assets. Boardmembers therefore have a legal responsibility to use "sound business judgement" as they transact association business. This is why plans need to be made, because it is not responsible to ignore the reality of common area deterioration. For their personal liability exposure, Boardmembers need to act like corporate officers of multi-million dollar non-profit Real Estate partnerships.

The major assets of a community association can successfully be maintained with advance planning. While at their finest they are still estimates, responsible attempts at Reserve will result in stable budgets, absence of special assessments (except for true emergencies), limited liability exposure for the Boardmembers, and sufficient funds to repair or replace the major assets of the association.


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