By: Jessica Vail, The Falcon Group
It is widely known that having an updated Capital Reserve Study is vital for the success of any community association; as it is a guide to help set aside funds and is the road map for all future capital improvement projects and expenditures.
How to understand your reserve study
The Reserve Study includes the identification, quantification and financial analysis of only the replacement or major repair of the association’s common elements. It offers recommendations as to the amount of money an association should fund on a yearly basis. The analyses and recommendations are important in that they help avoid possible future special assessments of the individual unit owners. The analyses also takes into account the site-specific existing conditions, their useful life and the realistic replacement and maintenance costs based upon actual material costs and site-specific individual item’s method of construction.
It is also important to include a preventative maintenance plan because it meets legal, fiduciary and professional requirements. It provides for the planned maintenance of major components and minimizes the need for special assessments. Homeowners, especially those on fixed income, may have limited resources and might be unable to afford the large special assessments necessary for major replacements.
While it is recommended that a community’s Reserve Study is updated every three years (5 for new communities), it is important to look at the reserve study as a living document. There are many instances that require an update even within a three-year window. For example, if the community has had a major renovation or replacement project, it is imperative that the Reserve Study reflect this change to retain its accuracy and make sure funds are being properly allocated. If there is any uncertainty, it is always recommended to consult your engineer or Reserve Specialist.
Planning for the future
Far too often, associations are finding themselves in an underfunded position at the beginning of a replacement project. Whether it is reconstructing roadways, sidewalks, roofs or other aspects of the community, the association will rely on funding that has been recommended and established over the useful life of the item.
Standard useful lives are, often times, based solely upon standards used in the engineering industry taken from information listed in life cycle analysis publications and/or manufacturer’s specifications. This can result in underfunding. Site specific useful lives must be used. Actual conditions must be physically inspected and changes must be made to the projected useful lives as conditions change. Aesthetics may also affect the replacement of an item sooner than scheduled.
Another key factor is: quantities. Quantities should be verified by the as-built conditions. This must be done for any initial reserve analysis and should always be field-checked on subsequent studies. Failure to provide an association with correct quantities may result in a significant underfunded condition in the future.
The unit costs provided in the funding table for the replacement of the Capital Reserve items should be based upon a number of sources, including published documentation on replacement costs. They should also be based upon the Reserve Specialist’s experience in site and building construction. The individual reconstruction or replacement of each item should be analyzed and the resulting unit costs should be adjusted accordingly. Individual (site-specific) characteristics affecting the unit’s costs are different on every site and the replacement costs must be adjusted accordingly. Existing site conditions, the size and scope of the future replacement project, the job access locations; the site restoration costs and presence existing components are all variables that affect the item’s replacement costs. Many times the unit replacement costs shown in these studies barely cover the materials costs for the item.
There are quite a few moving parts involved with an accurate Capital Reserve Study. It is imperative to work closely with your engineer or Reserve Specialist to ensure its accuracy and that the study is being updated on a regular basis to fit the needs of your community.