Skimping on Reserve Contributions Doesn’t Save you any Money!

What’s better – $50/mo Reserve contributions (as part of your condo’s total monthly assessment) or $70/mo? All other things being equal, I’d rather pay a $50 monthly bill than a $70 monthly bill. But… not all other things are equal.

Let’s say you live in a 80 unit condo, and the Reserve Study finds your association needs $5600/mo in Reserve contributions to offset ongoing deterioration and prepare for upcoming Reserve projects. That works out to $70/unit, each month. But the budget is tight (author’s note… isn’t it always?), and the board wrestles with and proposes $50/mo, because other costs have increased and hey “something’s got to give” in order to stay within their targeted assessment increase.

So the association needs $70/mo from each owner, but is only going to get $50/mo. From a purely short term view, no big deal. But I hope the alarm bells are going off in your mind. The association needs $5600/mo to prepare for roofing, carpeting, a replaced lobby entry system, and all the other components in the Reserve Study. There is a 100% chance all those assets are going to fail and need to be replaced, and you can’t pay for those projects with imaginary money.

What happens when that happens? In the short term, no big deal. You pay for any necessary Reserve projects from Reserves. But the alarm bells get louder… the Reserve Fund gets smaller. Eventually there will be a special assessment, when the funds don’t exist for these projects that the board saw coming years in advance (cue more alarm bells from increased liability exposure).

The special assessment forcefully takes from the owners the funds that they kept in their pockets while they were enjoying lower Reserve contributions. So the homeowners never really “saved” any money. In addition, in a recent study we found (not surprisingly) that home values in condo associations with weak Reserves significantly lag behind home values in associations with a strong Reserve fund. So there’s a bigger factor in play than if Reserve contributions are paid on a monthly basis or via “catch-up” special assessments.

Bottom line: the cost of deterioration never goes away, even if ignored. The roof will rear its ugly head and need to be replaced, usually close to “on schedule”, just like all your other components. If ignored, not only will the association get backlogged with deferred maintenance (the cost to repair which often exceeds original cost estimates), property values get dragged down. Save $20/mo on your Reserve contributions, and your owners will pay it all back by means of special assessments, or worse, with lost home values. As you’ve heard before, there is no free lunch.

See a related short video here.

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Adequate Reserves – (Finally!) Defined

Many, if not most Governing Documents require the Board to set aside “adequate Reserves” to care for the common areas. But what exactly are “adequate Reserves”?

I was recently challenged to define the concept of adequate Reserves by a number of attorneys and D&O carriers. The attorneys wanted to know how to give liability exposure counsel to Boards to help them avoid claims of “inadequate Reserves”. The D&O carriers wish to understand what is and isn’t responsible behavior, as it affects their loss exposure from claims levied by disgruntled homeowners.

So I enlisted a number of Reserve Study providers from other esteemed Reserve Study firms across the country (among them Mitch Frumkin from Kipcon, John Poehlmann and Ted Salgado from Reserve Advisors, Peter Miller from Miller Dodson Associates, and Bob Browning from Browning Reserve Group) to join me in crafting a long-needed definition. It is not yet endorsed by any governing body, but I’m excited to share our results with you:

“Adequate Replacement Reserves” is defined as a Replacement Reserve Fund and stable and equitable multi-yr Funding Plan that provides for the timely execution of the association’s major repair and replacement expenses as defined by National Reserve Study Standards, without reliance on additional supplemental funding.

This definition combines two concepts: the size of the Reserve Fund (measured by cash or Percent Funded), and a responsible multi-yr Funding Plan. It takes both for an association to claim they have adequate Reserves. A small Reserve fund which requires crippling high Reserve contributions may pencil out as “cash positive”, but one would not describe their situation as “adequate”. On the other hand, an impressively large Reserve fund in an association that is recklessly making inadequate contributions is also not “adequate”, as such a Reserve fund will soon require supplemental funds in the form of a loan or special assessment. In addition, our expectation is that the component expenses will be all reasonably foreseeable projects that meet the standard National Reserve Study Standards four-part test, not just a few carefully selected components in the next X years, or a short list of required components that barely meets a local statutory requirement.

So “adequacy” is not defined as a particular cash balance, Percent Funded, Funding Methodology, or Funding Goal. Adequacy it also is not defined by the type (or date!) of your most recent Reserve Study update. So I present to you the above definition of “Adequate Reserves”. Now Boards and industry professionals know what that means!

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How to Fund California’s SB 721 Deck Inspections?

In a previous post, we described how the requirements of California’s proposed SB 721 (safety inspections of decks and balconies in multi-family buildings) would not be satisfied by a Reserve Study site inspection. So the question now becomes, if this Senate Bill becomes law, how will associations deal with this new expense?

As it stands now, SB 721 requires the first inspection be performed by 1/1/2024, and every six years thereafter. And because this inspection must to be performed by a licensed building professional, it will likely not be an incidental cost easily absorbed without effect in the association’s ongoing Operational Budget.

Per National Reserve Study Standards, Reserve expenses must meet a standard four-part test: that it address a common area maintenance responsibility, that it must have a defined life cycle, that it occurs on a predictable manner, and that it be above a minimum threshold of significance. So the association’s cost for a scheduled, regularly recurring significant expense like a safety inspection for common area decks or balconies (even “exclusive use” common area private balconies) clearly meets the National Reserve Study Standard four-part test.

This is a project that the association should discuss with their Reserve Study provider, where they share the cost projections they have received for the inspection project, and their expected timing to perform the first project. Handling this expense through the Reserve budget allows funds to be collected evenly and fairly over six years, resulting in the funds successfully being ready at the appropriate point in time.

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Real Estate Claims of “Strong Reserves” – Be Careful!

We subscribe to a media monitoring service that scours the internet for any “mention” of our company name.  We do this to measure our influence in the Reserve Study industry and identify hot issues or trends.  With a company name like “Association Reserves”, we’ve had to refine our account settings to avoid the inevitable “such & such Association reserves the right…” and other irrelevant web posts.

But one trend that continues to surprise me is how often claims of “excellent condo association reserves” and “strong association reserves” appear in our weekly monitoring reports.  By following the links, I discover that these phrases appear on condo listings from major real estate marketing sites including Redfin, Trulia, and Zillow.  This raises many questions in my mind: What is the basis of such a claim? Are any of these major firms concerned about liability should the listing agent be making unsupported claims? It’s one thing to state “great views” or “gourmet kitchen”. It’s a very different matter to state claims about a measurable condition!

Reserve Strength-RE

As the founder of a company that has prepared over 45,000 Reserve Studies for Association-governed communities in all 50 states and over a dozen foreign countries, I know of only one way to determine the strength of a Reserve Fund. It’s not a feeling or observation, it’s called a Reserve Study. I also know, based on 30 years in this industry, that only small fraction of the 380,000 associations in the United States have had a Reserve Study prepared by a credentialed provider within the last three years. Of those that have, about 70% are underfunded.  That means very few associations can support a claim that they have “strong Reserves”! For the others? It’s a mystery, leaving prospective buyers to worry about special assessments and the association’s ability to perform common area repairs & replacements in a timely manner (supporting their home’s value).

Prospective buyers should go cautiously into a purchase transaction without the full disclosure that a recently updated, credible Reserve Study provides.  It seems to me that anything less, including a seller or listing agent’s “feeling” of strong Reserves, is risky ground.

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(CA) Senate Bill 721: Deck Inspections and Reserve Study Inspections

In California in the first half of 2017, Senate Bill 721 has been proposed, a bill which requires all exposed decks/walkways more than 6 ft above ground, in structures containing three or more multi-family units, to be inspected before 1/1/2023 and every six years thereafter. This inspection requirement is designed to ensure that these surfaces are in generally safe condition and in adequate working order. As written, the inspection is to be conducted by “a licensed architect, licensed civil or structural engineer, or an individual certified as a building inspector or building official”.

I do not have an opinion on the merit of this new inspection requirement. That is for others to discuss. My concern is the arguments I have heard challenging this new law, specifically with regard to condominium associations. Some have argued this law is not necessary, as all the common areas are required to be evaluated by a “diligent, visual site inspection” as part of a Reserve Study update at least every third year (CA Civil Code §5550(a)). So why would an association need a specific deck inspection now and every six years into the future when they have a Reserve Study inspection every three years?

Because even the best Reserve Study site inspectors, including those with the “Reserve Specialist” (RS) or “Professional Reserve Analyst” (PRA) designation are generalists, looking at the cyclical deterioration of the common areas. Reserve Study professionals are looking for where the roof is in its life cycle, where the fence is in its life cycle, where the pool heater is in its life cycle, and (specifically) where the deck sealant is in its life cycle. Even the best and most experienced Reserve Study professionals are not inspecting for moisture intrusion, inappropriate flashing or coatings, fundamentally flawed design (or sloping), etc. The bottom line is that Reserve Study professionals are not inspecting for safety or the well-being of the residents. Reserve Study professionals are inspecting for budget purposes.

In conclusion, if safety inspections are needed for the elevated decks and walkways of residential buildings in the State of California, don’t expect that task has been, or will be performed as part of the association’s every-three-yr With-Site-Visit Reserve Study inspection.

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The Benefit of Updating your Reserve Study Annually

Reserve Studies are budget planning and disclosure documents prepared to help the board meet their responsibility to care for the assets of the association. Many of the association’s common area components are so large that the association needs many years to prepare for those expenses financially. So what happens when Boards don’t update their Reserve Study for years, and instead make decisions based on outdated information?

Reserve Studies involve an evaluation of the current physical assets of the association, and a projection forward of ongoing deterioration, contributions, and expenses. This information quickly becomes outdated, perhaps as soon as weeks after it is prepared.

Many states require Reserve Studies to be updated on a particular basis, with the most common being states that require updates based on a diligent visual site inspection every third year or every fifth year. So are these intervals “good enough”? What happens when we compare associations updating their Reserve Study every three or five years to associations updating this key information annually?

Associations who update their Reserve Studies every five years enjoy a 35.1% decrease in special assessments when they shift to updating their Reserve Study annually.

Associations who update their Reserve Studies every three years enjoy a 28.5% decrease in special assessments when they shift to updating their Reserve Study annually.

It doesn’t matter what your local State Law says: special assessments are disruptive, divisive, and predictable years in advance everywhere. Put time on your side by updating your Reserve Study annually, significantly lowering your exposure to special assessments.

SA Risk - UpdatingRead more here:

Are annual Reserve Study updates required in California?

Why annual updates lower your special assessment risk

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EQ Retrofitting in Los Angeles, 2017

by Steven Beltramo, Project Manager, Association Reserves

The Issue:

Homeowners and Association Managers need to be aware that the City of Los Angeles has passed Ordinances 183893 and 184081, city laws that require the earthquake retrofitting of buildings that fall below current safety standards. The ordinance is intended to reduce the risk of injury and loss of life that may result from the effects of earthquakes. In this article we will address how these Ordinances relate to community associations and their Reserves.

Does this Apply to Me?

The City of Los Angeles is preparing and sending Orders to Comply to approximately 15,000 buildings determined to be at-risk: multi-family buildings (4 or more units) built to standards predating 1/1/1978. Generally these will be multi-story wood buildings with ground-level parking under living space. An easy way to check if your building is affected is online at Follow these steps: search your building in the look-up bar. Click the “jurisdictional” tab, then click “building permit info view” and a list of all permit information will come up. This tool only works for properties within the City of Los Angeles.

Addressing the Issue:

If your association receives an Order to Comply, you essentially have seven years to complete your retrofit project. Your first step should be to hire a licensed professional engineer to confirm the City’s preliminary diagnosis, seeking a waiver if your building has been incorrectly identified as being at-risk. If your building requires a retrofit, it will be expensive. Depending on your building’s design, ballpark costs will likely be $10,000 – $25,000/unit.

Can I pay with Reserves?

Your Reserves are for predictable repair and replacement projects. The Reserve fund for most associations is already “underfunded” for existing Reserve components, so associations should not consider their Reserves as readily available for this new project. In addition, the amount of funds needed for EQ retrofitting is overwhelming compared to the size of the typical Reserve fund as a whole (even if your Reserves are Fully Funded). Finally, because the retrofit ordinance is a legislated mandate, this project does not meet National Reserve Study Standards for a Reserve expense. If this project is (inappropriately) added to your Reserve component list, it will overwhelm your other Reserve projects and mask the true condition of your Reserves.


Depending on the timing of your existing Reserve projects, you may be able to borrow some Reserve funds (perhaps $500 to $1000/unit) to seed this retrofit project while other funding (one or more emergency special assessments enacted by the board, or a loan) is established. Civil Code 5515(d) allows an exception to 12 month “borrowing from Reserves repayment” rule in cases such as this.

Bottom line: retrofitting will be expensive and may create a trying few years, but could save your life when “the big one” hits!

For more information click here.

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Avoiding Future Special Assessments

By Drew Sleezer, Project Manager

Life is full of risks. You may be stuck with your current circumstances, but you have surprising power to influence many future risks. As a manager or board member, you are responsible for the care of common area assets enjoyed by many homeowners. Understanding your association’s current risks and knowing what action you can take to minimize future risks is an important part of your responsibility.

As a part of every Reserve Study, we calculate the association’s Percent Funded, a measure of the association’s Reserve cash-on-hand compared to common area deterioration. It’s no surprise that special assessments are much more common among associations with relatively little cash compared to the value of common area deterioration (having a low Percent Funded). Data from over 40,000 Reserve Studies prepared over the last 30 years has allowed us to prove the clear relationship between Percent Funded and Special Assessment risk.

We know that associations in the 0-30 Percent Funded range should expect special assessments almost 50% of the time (once every other year, on average), because the association has no cash margin for events that don’t go according to plan. Take a look at the Baseline (designed to keep the Reserves cash-positive) Reserve funding plan shown below for the association’s next 30 years. The association is currently 54% Funded, in the 30-70% range where special assessments occur about 12% of the time (about once every eight years). Let’s say the board is comfortable with that level of risk, but no more. So why would we counsel them that Baseline Funding isn’t a good decision for their association? They are projected to have “enough” cash, aren’t they?

The reason is that special assessment risk is additive. It is like flipping a coin, where half the time you get “heads”. So after two flips, it is likely you’ll get one “heads”. After 10 flips, it is likely you’ll get five “heads”. You can see in this association’s Baseline Funding plan that over the course of 30 years they are projected to be in the (red) 0-30% range nine years. This means the association will likely have four or five special assessments during the years their Reserves are in the red 0-30% range. That’s too often for this Board! So they’re going to have to increase their contributions a bit, to prevent their Reserve Balance falling into the high-risk 0-30% range.

It’s all a matter of funding Reserves appropriate to your risk tolerance. Don’t let today’s “acceptable risk” drift to tomorrow’s “unacceptable risk”! The future is uncertain, but that is different from unpredictable. The budget decisions you make today will affect your association’s special assessment risk in future years.Funding Plan - Baseline

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How Much are Adequate Reserve Contributions?

by Steven Beltramo, Project Manager

At Association Reserves we understand board members face a big challenge to budget for the maintenance and replacement of their association’s major common area assets. Boards typically have little knowledge of project costs and when those costs are expected to occur. Looking to the Reserve Study for guidance, most members will review the document and exclaim, “We’re supposed to put THAT much in?” Such a realization often brings a chill to the budget process.

For board members, the size of adequate Reserve contributions are regularly viewed as dark and mysterious. Board members often tell us they feel as though they are moving forward in the dark. They know they’ll face the wrath of their members if special assessments are needed because of past low Reserve contributions, and they know those same owners will be upset if Reserve contributions are “too high”. The path to budget success can appear very narrow.

In order to answer, “What is normal?” We randomly selected 120 different associations to study from more than 4,000 we served during 2016.  We compared our recommended Reserve contribution rates to the association’s total assessment rate.  From this data, a clear story began to emerge.  In the Figure shown below, you can see that about 90% of associations need to set aside 15% to 40% of their total homeowner assessments towards Reserves in order to offset deterioration and minimize their risk of a special assessment.

The cost of unchecked deterioration is expensive and unrelenting. Associations able to get by with Reserve contributions under 10% of total budget are rare.  Most associations with Reserve contributions under 10% of total budget are headed for special assessments in the future.

So from all of us at Association Reserves, we hope this study sheds some light on the dark mystery, “How much are adequate Reserve contributions?”reserve contribs

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Change to the FHA “10% to Reserves” Rule?

FHA approval is a status condo associations can attain, allowing unit owners/buyers to receive FHA insurance on their loans which make those loan more attractive to lenders. Depending on your location, as much as 30% – 40% of all residential loans are for people who enjoy FHA insurance. Without your association on the FHA’s “approved” list, you are instantly reducing the buyer pool for units at your association by a significant fraction. If your association is FHA-approved, significantly more buyers can afford to shop for homes in your association because of more favorable loan terms. Current owners benefit by lower time on the market and stronger sales prices. Read more about FHA approval in general here and here.

But the FHA, in order to provide these favorable terms, needs the association to “toe-the line” and meet some minimum standards. For the last few years, these standards have included such things as owner-occupancy ratios (must be at least 50%), and Reserve funding (must be at least 10% of total budgeted income).

On 10/26/16 the FHA came out with a revised set of standards so associations could become approved with owner-occupancy as low as 35%. In their eyes, to accept this higher risk they needed to lower the risk level somewhere else. They chose Reserve funding. So for associations seeking FHA approval with owner-occupancy between 35% and 50%, the FHA will consider them for approval if their Reserve contributions are 20% of total budget. Since adequate Reserve contributions for most associations are 15%-40% of their budget, this indeed stiffens up Reserve funding requirements but doesn’t constitute an insurmountable obstacle.

So when you hear the FHA has doubled its Reserve funding requirement up to 20%, know that this only applies to associations with owner-occupancy between 35% and 50%. The “10% of budget to Reserves” rule still applies to associations with an owner occupancy ratio over 50%.

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