Choosing the Appropriate Reserve Study Provider
Written by David T. Schwindt, CPA RS PRA Published: 15 August 2013
Due to the dramatic growth in homeowner and condominium associations during the past 10 years, associations have seen a corresponding rise in the number of reserve study providers. Boards of directors are charged with the responsibility of choosing the appropriate reserve study provider to meet the unique needs of their association. This article discusses the criteria boards should consider in choosing the appropriate reserve study provider.
Reserve studies are typically a 30 year cash flow budget designed to mitigate the need for special assessments by analyzing the cash flow needs of repairing, replacing and maintaining all building components of the association required by the associations’ governing documents and certain state statutes. The skills required to perform this service require technical research skills as well as technical budgeting and accounting skills. These skills require a degree of academic excellence evidenced by at least a bachelor’s degree. Although an engineering or architectural degree may be helpful, these degrees in and of themselves do not insure that each component will be thoroughly analyzed and a technically correct reserve cash flow budget will be prepared. Certain components fall outside the typical subject areas of these degrees such as asphalt, elevators and plumbing systems which require research to ascertain estimated useful costs, replacement costs and maintenance requirements. Also, materials and technical specifications for certain components are constantly changing requiring a regular update to this knowledge base.
Although the reserve study provider may be required to perform a site visit, it should be noted that this type of visual observation is not to be confused with a complete building envelope inspection which may include intrusive openings. If the visual observation discovers issues, the next step is to enlist the aid of a forensic water intrusion expert or a qualified contractor specializing in repairing, replacing and maintaining the specific component for information regarding a potential course of action and the associated estimated cost. Once this information is obtained, the reserve study provider must test this information against industry standards and if appropriate, seek additional opinions from qualified vendors. I refer to these types of procedures as a “component audit”. Once the appropriate information is obtained, the reserve study provider must document the results of the “audit” in the reserve study. The skill set required to perform a “component audit” requires excellent inquiry and observation skills, communication skills and exceptional research skills as well as being able to succinctly record this information in a written narrative. I would be wary of reserve study providers that boast a background in construction or the trades as a basis for effectively analyzing components and communicating the results of the “component audit”. This process requires a deliberate and systematic analysis with due care when communicating the results to the board.
The results of the “component audit” lead to the next phase of the engagement, the funding analysis. To be effective in this phase, the reserve study provider should have a strong background in math or accounting including budgeting and cash flow analysis. The funding phase of the study is so critical to the process, I would require the provider to at least have an accounting background with a bachelor’s degree.
It should be noted that industry designations such as “reserve specialist” and “professional reserve analyst” do not specifically require academic credentials. I believe they are an important requirement in selecting a reserve study provider. However, these designations generally relate to shared ethical standards and adherence to report formats and disclosures. The fact that a reserve study provider has obtained these credentials is not in and of itself, an indication that the provider has the academic credentials to meet the expectations of the board.
Experience with providing reserve services is an important qualification in selecting a reserve professional. However, I would also add the requirement of experience working within the budgeting process including the operating budget. The reserve study budget is merely a part of the association’s overall budget. It is impossible to prepare a comprehensive reserve study without considering the operating budget to insure that needed maintenance procedures are funded in either the operating or reserve budgets and to also insure that certain costs are not included in both budgets thus duplicating costs and unnecessarily inflating the assessment.
The ability to effectively communicate complex issues to lay persons is an essential requirement of the reserve study professional. These skills generally are developed over years of working with boards of directors. The analysis and interpretation of governing documents, their relationship to the duties of the board and association as they relate to the reserve study and the communication of this analysis to the board takes skill, experience and academic excellence. Aspects of the reserve study process may need to be presented to the board and membership to aid in the understanding of the duties, need and effect of the study on the future of the association. Effectively communicating the results of the reserve study to the board and membership may make the difference between acceptance of the desired assessment or total rejection resulting in a community that is underfunded and not financially stable.
References from community managers and like sized associations may aid in the decision making process.
The selection of the reserve study provider may be one of the most important decisions of a board. Due care should be exercised in using the appropriate criteria in the selection process.