Asked & Answered: Reserve Studies

Feb 26, 2014
Asked:

Our Board Treasurer is a retired engineer.  The Board recently started discussions about hiring an engineering firm to update our reserve study, but some members of the Board, including the Treasurer, insist we save that money and instead allow the Treasurer to conduct a study.  Even though the Treasurer has offered to do the study for free, is this appropriate?

Answered:

Due to the complexity of reserve studies as well as the far reaching impact that the findings of a reserve study will have upon an association, this specialized task should be entrusted to professionals who are independent of the association, independent of the board, properly credentialed and adequately insured.  Since board member participation is an important component of a successful reserve study, you should encourage your board members -- especially those board members with civil engineering backgrounds --to become involved with any reserve study.  The retired civil engineer on your board member could assist with interviewing potential reserve study professionals as well as gathering architectural plans and other documents that could assist with the reserve study.  Once a reserve study is underway, the retired engineer could serve as the board's liaison with the reserve study professional.

It is difficult to overstate the importance of a reserve study.  The reserve study is the primary planning tool for ensuring that an association has sufficient funds when capital expenditures are necessary while making sure that each unit owner is contributing his or her fair share towards the capital expenses.  Insufficient or inaccurate reserve funds can lead to special assessments and bank loans.  Some states actually mandate the performance of reserve studies to varying degrees of detail.  In June 2011, the United States Department of Housing and Urban Development, with certain exceptions, made reserve studies mandatory for all new condominium conversions applying for FHA insured loans.

A reserve study is essentially a three step process.  Step one involves identifying the capital projects to be included in the reserve study.  Items included in reserve studies have predictable maintenance and/or replacement lifespans that typically exceed ten years.  Such capital projects can include the resurfacing of roadways, the replacement of carpeting, the replacement of roofs as well as the maintenance of elevators.  Step two involves evaluating the present condition of the capital items, determining the timing of the capital projects and calculating the associated costs.  Step three is the financial analysis that calculates the amount of money that the unit owners must contribute on an annual basis to adequately fund the association's reserve account.

In order to assist in selecting the appropriate professional to perform a reserve study, certification criteria have been established by the Community Associations Institute ("CAI") and the Association of Professional Reserve Analysts ("APRA").  The certification offered through CAI is the Reserve Specialist.  In order to obtain the Reserve Specialist certification, a candidate must have completed at least 30 reserve studies within the past 3 calendar years as well as possess a B.S. in construction management, architecture, engineering or some type of equivalent.  In addition, candidates seeking the Reserve Specialist certification must demonstrate compliance with relevant professional codes of conduct.  The certification offered through APRA is the Professional Reserve Analyst.  Like the certification offered through CAI, candidates seeking the Professional Reserve Analyst certification must demonstrate relevant educational and work experience qualifications.

Apart from making sure that your association receives an accurate and thorough reserve study, selecting an independent professional can shield your board from liability, criticism and negative politics.  Given the complexity and financial consequences of a reserve study, any board should think twice about taking on the potential liability of conducting a reserve study internally.  As we all know, people can make mistakes.  For that reason, most engineers and architects maintain professional liability insurance coverage.  If a reserve study performed by a professional turns out to be inaccurate, it would be very difficult for the unit owners to fault the board for hiring an independent professional.  More important, the professional's liability insurance policy could possibly cover whatever loss was attributable to the inaccurate reserve study.  While it is great that you have a board member who is willing to volunteer his time to update your association's reserve study, your board would be better served by maintaining a level of separation between itself and this important task.

Matthew C. Collins, Esq., Marcus & Hoffman Attorneys at Law
www.marcushoffman.com

 


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