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Page 16 — Property Management Quarterly — May 2015
C olorado homeowner association
community managers have
a lot on their plate this year,
with the upcoming manager
licensing and new proposed
legislation about construction defects.
So where do reserve studies need to fit
on managers’ to-do lists and what case
can be made for recommending one
to a community volunteer board? For
multifamily prop-
erties with a lot of
shared maintenance
and shared costs,
reserve studies can
be a valuable tool. At
first glance, getting a
reserve study done
comes at a cost and,
for now, the state of
Colorado does not
have any law requir-
ing an HOA to have
a reserve study in
place. So why should
communities con-
sider having one?
Reserves are put
in place to complete repair or replace-
ment projects on a schedule without
the need for special assessments or
loans. Community associations come
in all sizes and vary in age, amenities
and maintenance obligations, thus the
specific recommended amount of cash
needed in reserve can only be deter-
mined from a professional assessment
by a reserve specialist.
Reserve studies assess the current
and future needs of a community and
make recommendations for how best
to get there.The fund ensures everyone
is paying his fair share now and in the
future. If the recommendations are
properly implemented, the regular col-
lection of the funds from residents can
help keep HOA dues consistent with
regular planned increases over time
rather than special assessments, which
ensures that some don’t end up paying
more now or later in order to get some-
thing done.
“Reserve studies help the board prop-
erly budget for future expenditures and
knowwhat the HOA’s responsibilities
are, therefore we recommend reserve
studies to all of our clients,” said Car-
men Stefu, principal and member at 4
Seasons Management, and president of
the Community Association Institute –
Rocky Mountain Chapter.
A reserve study is a physical and
financial check-up for a community.
There are two components of a reserve
study – a physical analysis and a
financial analysis. During the physical
analysis, a reserve provider evaluates
information regarding the physical sta-
tus and repair and replacement costs
of the association’s major common
area components. A financial analysis
assesses the association’s reserve bal-
ance or fund status (measured in cash
or as percent funded) to determine a
recommendation for an appropriate
reserve contribution rate (funding plan).
Maintaining an appropriate reserve
fund can meet a number of legal, fidu-
ciary and professional requirements
by the management company and its
board.
“Each community should decide for
themselves whether to have a reserve
study, who to obtain it from, how often
to update it and how to implement
it,” said Jerry Orten, HOA attorney and
partner at Orten Cavanagh & Holmes.
“Most HOAs are required to have a
governance policy on these aspects of
reserve studies and funding. Ideally, the
community determines what is best,
consistent with the expectations and
demographics of owners in the com-
munity, and in conjunction with the
HOA’s community manager, HOA attor-
ney and other advisers.”
A reserve study gets everyone in the
association on the same page – from
the management company to the
board of directors to the owners and
residents.
“It typically includes the following – a
summary of the association, including
the number of units, physical descrip-
tion of the common and limited com-
mon components, and the financial
condition of the reserve fund,” said
Jerome Self, reserve specialist, SBSA.
“The financial analysis includes a pro-
jection of the reserve starting balance,
recommended reserve contributions,
projected reserve expenses and the
projected ending reserve fund balance
for a period of 20 to 30 years (depend-
ing on the term of the study).”
The physical analysis includes a
listing of the component inventory,
current condition of the components,
component quantities, identifying
descriptions, expected useful life,
remaining useful life and current
replacement costs, Self said. A descrip-
tion of the methods and objectives
used in computing the fund status and
in the development of the funding plan
is also included, as well as the source
used to obtain component repair or
replacement cost estimates.
A reserve study will differentiate
between operating costs and deferred
maintenance and provide an outline
of what needs to be done when and at
what cost. It is important for associa-
tions to stay current on regular main-
tenance and what is recommended in
the reserve schedule to get the most
useful life from components. Addition-
ally, if associations do not maintain the
components that are not included in
the reserve schedule, they may require
replacement, whereas if they were
maintained, they would not.
“Wood siding, when maintained
properly, will last indefinitely but with-
out proper paint coverage, it may need
to be completely replaced in the future,”
said Brent Rumpf, Shaker Painting
owner. “Thus painting for HOAs can fall
into either an operating cost or deferred
maintenance, but in either case it must
be done in a timely manner for both
upkeep and to prevent further damage
to the community’s property.”
The strength and health of a commu-
nity is based on its percentage funded
according to the reserve study recom-
mendation. Many states enacted legis-
lation dealing with community asso-
ciation reserve and operating funds to
protect owners from fiscal problems
and financial hardship. Reserve studies
are currently required in California, Del-
aware, Hawaii, Nevada, Oregon, Utah
andVirginia.Washington encourages
associations to have a reserve study
performed every three years.
A 2013 study conducted by Advanced
Reserve Solutions found that in states
where reserve studies are required the
communities were in better condition
than in those states that do not have
the same laws, said Richard Hirschman,
Advanced Reserve Solutions. “For
example, in California the lawwas
passed in 1986 and its average reserve
is 84 percent funded, and in Nevada
where the lawwas passed more
recently, they are 70 percent funded,”
he said. “In Colorado, where there is no
legal requirement, based on available
data, they are at only 38 percent.”
If a community is short on available
cash reserves, it can look to obtain a
loan, however, loans can be a catch-
22. Often a bank will require a reserve
study in order for an association to
obtain a loan when it needs it most. If
a reserve study is done after the fact
to get a loan, a community may find
itself surprised by the current financial
shape and learn they need to access
more capital than initially anticipated
when applying for the loan. Beyond
lending to the HOA itself, lenders are
looking at the reserve study’s percent
funded by the HOA when offering
loans for individual units as well. If
there is a high risk of a special assess-
ment banks tend to avoid lending.
“A current reserve study in place
can go a long way to preparing and
reducing the number of potentially
unknown factors of future expenses
by taking into account all the major
components that could possibly need
maintenance, repair or replacement
in the future,” saidWesWollenweber,
attorney at Ciancio Ciancio Brown. “In
this way, if a community sees a need
for a future loan, they are in a better
position to obtain it.”
In order for the community to thrive,
everyone needs to work to ensure the
association’s financial needs are both
known and met. A flourishing com-
munity knows its mission, vision for
the future, operating values, needs
(strengths, weaknesses, opportunities
and threats), goals, prioritized actions
and strategies, action plans and moni-
toring plans.
“Savvy future residents look at the
overall upkeep and maintenance of
a community as well as its financial
health,” said Bryan Farley, president of
Association Reserves Colorado. “A com-
munity without a reserve study can
send up a red flag, whereas a current
reserve study can inspire confidence
by effectively communicating its cur-
rent reserve status and projecting
where the association’s reserve bal-
ance needs to be in five, 10, 15 years
(with our studies going out 30 years)
– and how the association can get
there.”s
Management
Philippa
Burgess
Marketing and
community
relations, Shaker
Painting, Denver
Reserve studies are not required by law in Colorado, but are required in other states.
Photo courtesy Shaker Painting
A reserve study helps get everyone in the association on the same page, including the
management company, the board of directors, the owners and residents.