It is a question we receive frequently from Residents and Board Members, in addition to lending institutions. Freddie Mac and Fannie Mae cover the super-majority of loan requirements for refinancing and purchasing of condominiums and townhouses. And now, they ask questions in every sale that the management company must answer, such as:
- When was the last reserve study?
- Is the Association funded in accordance with the reserve study?
- Is the Association's reserve account adequately funded?
- Is there a plan to fund the reserves?
- Was a reserve study completed in the last 2-3 years?
- Attach the most recent reserve study.
- Was a structural inspection performed by a structural engineer?
- Is the property structurally sound.
For years, many communities have avoided investing in a reserve study. In these communities, many Homeowners and Board Members alike, questioned why it was necessary to hire an engineer, or Reserve Specialist, to visit the community, review the common elements, estimate useful life of the common elements, and provide a funding plan.
For the money invested in the Reserve Report, they didn't see the value it the report. Or if they did, all they did was file it in a drawer--- because the funding plan suggested and recommended would increase fees too much. The Homeowners wouldn't be able to afford it, they said.
Twenty years later, they wonder why, a 6 million, 8 million, or 20 million, or 40 million dollar special assessment is levied. And, that's if, the building is still standing and complete catastrophe hasn't resulted in the interim.
So what do we do to change the way of thinking? How can we break the cycle?
Whether we like it or not, the lending institutions, are no longer providing an option. Laws are being changed to force structural inspections and require reserve studies. Municipalities are tightening controls after buildings continue to collapse. And management companies continue to make best practice recommendations to their clients.
As a management company, we ask you, our clients, and prospective clients, to hear us and listen to us. Let us, help you make a plan for your community. Let us, guide you in the right steps. Let us help prevent a major catastrophe from happening in your community.
What is a Reserve Study?
A reserve study is a report created by a Reserve Specialist, often an engineer, who reviews the common elements (often called common components) of the Community Association. These components are assigned a useful life based upon a visual inspection. A dollar value to replace the element is assigned. Between the useful life of the component and the cost to replace it, the report explains how much money is needed to be saved over x amount of years to properly fund the reserve so that the Association has adequate funds at the time the component requires major repair or replacement.
Likewise, this useful life timeline provides the Board and Management with a maintenance plan so that they are aware of what projects should be completed each year. This assists with planning, bidding, and project management scheduling.
What is Deferred Maintenance?
Deferred maintenance in the common areas is neither what occurs in the course of every-day-business (which is included in your every-day operating budget), nor your reserve (which is detailed in your reserve study). These are items that are performed every few years, but less than every 5-10 years, normally.
Examples may include:
- Painting of wood
- Power washing
- Seal coating of asphalt
- Line striping of parking lots
- Cleaning of Balconies by high pressure equipment
A deferred maintenance is included in the operating budget as one singular line item, with a sub-note or sub-budget which details what this line is collecting for on an annual basis, and is used to fund projects over a few years. This one, singular, line item, defrays the cost over time so that Homeowners are not burdened with large lump sums at one time for specific projects.
What is a Deferred Maintenance Schedule?
A deferred maintenance schedule is a schedule that is included with the operating budget or as an addendum (or separate schedule) with the reserve study. This can be prepared by the Management Company (if it is included with the operating budget) or the Reserve Specialist (if it is included with the Reserve Study).
What Happens When Your Reserves Are Not Adequately Funded?
When there are not enough funds in the reserve account to fund a project, or multiple projects that have to occur at the same time, the Association will be forced to special assess the unit owners, increase Association fees, and/or apply for a loan for financing of the project(s).
If the Community is in disrepair, it is possible for the local municipality to mandate eviction until funds are raised and repairs are made.
Additionally, the Association risks the ability for individual Homeowners to refinance their homes (current residents) or sell their homes to new buyers due to lenders asking questions about the health of the reserve status.
Summary:
Reserve Studies are important to the health and well-being of all Community Associations. A Level I Reserve Study will review all of the Governing Documents, ensure that the common components of the Association are listed, provide an on-site inspection with measurements, list the useful life of the common components, and the cost to replace the common components. Together, with the useful life and cost for replacement of the common components, the Reserve Study provides management and the Board alike, a planning tool for budgeting and major repair/replacement. Moreover, Banks/Lenders are requiring these studies to approve mortgages and refinances. To ensure that wear and tear to the common elements have not aged over time, and that pricing is still in align, reserve studies should be updated every 2-3 years.
NOTE: Funds for a Condominium or Homeowners Association always come from the Homeowners, if a grant is not available. While grants are starting to be considered by the Government for aging structures, they are not yet available. The best way for any Association to prepare for now and the future is to have a reserve study in place and fund the reserves according to the reserve study.
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Bricck Property Management is a boutique property management firm, with corporate offices located in King of Prussia, Pennsylvania. Bricck provides best-in-class property management services to Condominiums, Homeowner's Associations, and Planned Communities throughout Pennsylvania, New Jersey, and Delaware. Contact Bricck today for your cost effective, but high-customer service level proposal today. Phone: 610-596-8500. Email: info@bricck.com. Website: www.bricck.com.
