The reserve study is one of the most valuable planning tools available to the Board of a homeowner association. But all reserve studies are not created equal. Like painting, there is a right way and a wrong way to do it.
Some HOAs attempt to perform a reserve study internally, without the assistance of a Reserve Analyst. Many of these studies have measurement and cost errors plus missing components which create huge disparities in the projections. In many cases, there is no audit trail which tracks the source of the information used for each component. It often appears as though numbers were derived using the FTA (From Thin Air) Method (or was it the SWAG Theory?).
While an internally generated reserve study can work in theory IF the person performing it has specialized training, there is always the issue of conflict of interest. How can the results be free of bias when the preparer has a vested interest in the outcome? Would you let a Board Member perform an audit on the HOA’s books? For the most reliable results, it’s highly recommended that this task be reserved for professionals with the proper training and experience.
When requesting a reserve study proposal, laying out the scope of work is very important like any complex project. A Request for Proposal ensures compliance with state statutes and that the Board receives the information needed to make sound financial decisions.
It’s highly recommended that the Board preview a sample reserve study before hiring a company to do the work. The reserve study you order should be laid out logically and easily understood by laymen. If the Board can’t grasp information easily, the report will be of little value.
The Reserve Study itself should include a Table of Contents, Analyst’s Qualifications, List of References, Limitations of Study and Methodology Used. In addition, there are several key reports:
Component Summary which includes:
- Name and Description of each component
- Cost (per unit and/or total)
- Number of Units
- Repair/Replacement Cost
- Useful Life when new
- Remaining Useful Life if not new
Cash Flow Projection
- Starting Reserve Balance
- Span of Years Included
- Recommended Annual Contributions
- Interest Yield on Reserve Funds
- Percent Funded Indicator
- Inflation Factor Used
- Annual Expenditures by Year with inflation adjusted costs
- Income Tax Owed on Interest Earned
- Ending Reserves Balance
A reserve study that includes these features will provide the Board with an indispensable and usable planning tool which will help in maintaining the HOA’s assets in their best condition. To ensure you get what you pay for, insist on a proper protocol.
For on Reserve Planning,