Written by David T. Schwindt, CPA RS PRA Published: 15 August 2013
Over the years, various trade organizations and states have developed guidelines and statutes relating to the preparation of reserve study budgets that assist homeowner’s associations in determining future cash flow needs relating to the repair and replacement of common area property. I believe these types of minimum criteria provide valuable guidance for reserve study professionals and homeowner’s associations.
This article suggests an expanded approach to protecting the association’s and members’ most valuable asset – the building structures and related common area components.
After determining the association’s legal responsibility in maintaining, repairing and replacing common property, the next step is to fully understand the present condition of all common area components. Why is this important? Fully understanding the present condition of all components sets the stage for all aspects of the maintenance plan and reserve study. Without this information, maintenance procedures, estimated useful life and cost estimates are merely a guess. And guessing wrong may have a disastrous effect on the future condition of components and adequacy of the reserve and maintenance budget. Most reserve studies prepared for associations do not include an inspection by a licensed engineer or architect. These studies merely contain an inventory of components and use industry standards in estimating their remaining useful life.
The most important set of components is the building envelope, which would include but not be limited to the roof, gutters, siding, trim, windows and decks. It has been estimated that over 90% of the unanticipated costs of repair reside with the neglect and misunderstanding of these components. In order to mitigate these unanticipated costs, the building envelope should be inspected by a licensed water intrusion engineer or architect which would include, if necessary, intrusive test work.
This inspection is crucial in considering the design, materials, workmanship and the extent (or lack thereof) of past maintenance procedures employed. Without this inspection, the association is merely guessing at the adequacy of maintenance procedures and required reserve and maintenance budget requirements.
The next step in this process is to use the information derived from this inspection to design maintenance procedures that will help insure longevity of each component and reduce the overall cost of future repairs and maintenance. Certain maintenance procedures, such as exterior sealing and certain ongoing inspections, do not occur every year necessitating their inclusion in the reserve study. Other maintenance procedures occur annually and would ordinarily be included in the operating budget.
In my opinion, the reserve study/maintenance plan should include all maintenance procedures, repairs and replacements along with respective costs and frequency with an indication of whether the costs should be included in the operating or reserve budget. This will insure that all items are considered.
Ongoing inspections with related costs are an integral part of the maintenance plan and information derived from these inspections must be considered when updating the maintenance plan and reserve study.
In conclusion, visual and/or intrusive inspections, maintenance plans and reserve studies are completely inter-related. Failure to consider and integrate information from all sources may invalidate the results of the reserve and maintenance budgets and may have a profound impact on the effectiveness of protecting one of the most valuable assets of each member of the homeowner’s association – their home.