Should We Update the Reserve Study Annually?

August 15, 2014    Sean Erik Andersen, RS, Association Reserves - Orange County    Education

Yes, you should!

The role of a board member is to maintain, protect, and enhance the assets of the association. Typically, the most significant assets and related expenses of an association are those identified within a Reserve Study. To be an effective document for planning, communication and disclosure, it is essential that the data within the Reserve Study be both accurate and current.

Why Accuracy Matters

Inaccurate and accurateIt’s a fact that the facts change every year.  The physical condition of the association’s assets and the Reserve Fund balance continually change.  Major projects might be completed for more or less money than was expected.  A component may fail earlier than anticipated. These are issues that will affect the Reserve Study’s component list and funding plan, as well as the budget in the coming year.  Board members need to know how much to budget for Reserve contributions to offset ongoing deterioration, and what to tell the owners about how well prepared the Reserve Fund is to deal with upcoming expenses.  With Reserve contributions making up 15% to 40% of the typical Community Association’s budget, this is an important decision. Most Governing Documents require an “appropriate” amount of Reserves to be collected each year to offset ongoing deterioration of the common areas. That number needs to be adjusted annually in light of the association’s physical and financial changes.

No One Cares About Yesterday’s News

yesterday's newsUpdating your Reserve Study annually should be considered an integral part of association’s annual business processes, similar to the preparation of the annual audit, tax returns and budgeting procedures.  Without current Reserve Study figures (Percent Funded, Funding Plan, Component List), a Board is exposed to potential surprises.  With an annually-updated Reserve Study, a Board is armed with appropriate expectations regarding near and far term expenses. Having current-year Reserve Study information is a key tool  Board members can use in managing homeowner expectations and preparing to avoid future financial disasters.

In California, it’s the Law

Great seal of CaliforniaProper completion of the annual “Assessment and Reserve Funding Disclosure Summary” (required by California Civil Code 5570) can only be accomplished with a current-year Reserve Study and finalized budget information.  The purpose of this disclosure is to summarize Reserve Study results and clarify the current status of an Association’s Assessments and Reserves in a standard format on an annual basis, minimizing the chances of misrepresentation or surprise.

The Importance of Fairness

Importance of FairnessFinally, the Reserve Study should be updated annually because it helps make sure each owner pays their fair share of contributions to offset ongoing deterioration. It’s important to stop the cycle of special assessments which places the burden of past underfunding on the backs of the current owners. Adhering to a properly crafted Funding Plan sets the association up for successfully being able to accomplish their major repair and replacement projects on schedule, and demonstrates responsible fiscal behavior. Establishing a strong Reserve fund takes years of fiscal discipline, but association members are rewarded with maximized physical appearance of the property, maximized home values, minimized exposure to financial disruptions, and assurance that all owners are paying their fair share along the way.

 

 

About Orange County Reserve Study Services
Association Reserves has been conducting Reserve Studies in Orange County for twenty five years. Their clients range from large master planned communities to small townhome associations. For more information visit reservestudy.com/orange-county


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