HOA Executives: Reserve Studies, Sustainable Budgets Protect Homeowners Everywhere
As first responders sifted through the wreckage of Champlain Towers South in Surfside, Florida recently seeking unaccounted-for residents, America’s attention shifted to determining the cause of the tragedy… and how to prevent such calamities in the future.
Already a Florida task force has been created to examine regulations surrounding condominiums and make recommendations to strengthen condominium-board law, as well as laws regarding construction, operations, maintenance, and safety recertification – all to minimize chance of a future tragedy.
Early reports indicate widely known issues with ongoing maintenance on the 40-year-old building, and concern by residents over how expensive repairs would be funded from inadequate reserves — pools of money collected to pay for ongoing fixes. The tragedy emphasizes the importance of conducting a reserve study – and not just for those living in decades-old high-rise condominiums near the water.
For community associations, their job includes estimating costs of future repairs and replacements.
In such instances, a reserve study can be useful for community boards and managers to determine how much money will be needed over a specific period of time. It does so by analyzing each component of the common property, determining how long each component will last, and how much each component will cost to repair or replace when the time arrives, says Nicholas Brenneman of Reserve Advisors, a firm that prepares reserve studies for community associations across the country for clients.
“The reserve study establishes a schedule of annual reserve contributions that are fair and impartial to current and future owners. Additionally, following the recommended annual reserve contributions greatly reduces the risk of additional assessments,” Brenneman states.
Reserve studies help community associations focus on near-term capital projects. Based on a detailed condition assessment, the reserve study professional conducts life and valuation estimates, and develops a schedule of prioritized capital projects. Factors, including condition of each component, criticality of its repair or replacement in a timely manner, and current reserve fund status should be considered when prioritizing capital projects.
“Having a clear understanding of near-term needs helps support board decisions and ensures the most efficient use of reserve funds,” adds Brenneman. “And a reserve study professional should have experience in both the local market and with a customer’s type of community. The professional’s expertise is critical to life and valuation estimates that drive reserve funding needs since major discrepancies can result in being underfunded in the future. “
“A quality reserve study clearly documents the condition of each of your common elements,” he says, advising that the report “should also present a prioritized schedule of capital projects and annual reserve funding recommendations in a clear and concise format. The ability to understand the reserve study findings is critical to a board’s ability to implement the recommendations.”
Eric Kohorn, Vice President of NHE Inc. which is among South Carolina’s largest community management firms, agrees.
“Historically, we have seen many owners experience the pain of a special assessment because a board failed to properly account for future replacement needs,” states Kohorn. “What tends to happen is that boards begin to fund the reserves at a point in time but may then go years or even decades without revisiting and reassessing the replacement costs or remaining life of the components.”
When too much time passes without reassessing costs and replacement of a specific component is needed, Kohorn explains, the cost may far exceed funds on hand in the reserve account.
“What ends up happening is that the board has to approach the owners and explain that more money is needed from the membership, and that’s never a pleasant conversation. The reserve study, properly utilized, is what prevents that unfortunate event from occurring,” stated Kohorn.
Such, apparently, was the case in Surfside where residents did not implement needed repairs due to soaring projected costs. Then tragedy struck, lives were lost, and a community plunged into mourning.
Preparing accurate and sustainable budgets — including reserve studies — is part of a series of educational resources available from NHE, among South Carolina’s leading association management providers. For more information on NHE, its services, additional resources on community governance, or to sign up for its newsletter, please visit www.nhe-inc.com.