The Critical Importance of Reserve Studies and Funds

This article was sourced from: https://www.bjmco.com/blog/2021/12/02/the-critical-importance-of-reserve-studies-and-funds/

Thanks to Neal Bach of BJM Duluth and Nick Brenneman of Reserve Advisors for authorizing us to post this article.

The tragic collapse of the Champlain Towers South condominium in Surfside, FL, has left condo owners and HOA boards wondering how such a thing could happen. Following the incident, countless news stories pointed to underfunded reserves, squabbling owners and board members, delayed repairs, and escalating costs. They cited a 2018 structural engineering report that estimated repairs at $9 million, with cost increases to $16 million for still-unrepaired concrete and rebar earlier this year.

Sadly, as is the case in many tragedies, the Champlain collapse is a lesson for all HOAs in performing timely reserve studies, fully funding the reserve account, and regularly maintaining and repairing property. Consider these best practices:

  • Keep up with all repairs and maintenance. You wouldn’t let a roof continue to leak or prolong wood rot. These issues only worsen and become more expensive to fix over time. The same holds true for structural concrete and other building components. Expect fatigue and plan for it.
  • Regularly update your reserve study. Construction costs can drastically change in a short period of time. Plan to update your study every two to three years, and hire a specialty engineering firm that will consider the size, design, condition, age, and environmental exposure of your property. Look for certified professionals: licensed professional engineers (PEs), reserve specialists (RSs), and professional reserve analysts (PRAs).
  • React quickly to maintenance feedback. At worst, ignoring feedback can lead to a catastrophic failure. While catastrophes are rare, an ignored repair can easily turn into an expensive replacement. You can always seek a second opinion, and then respond.
  • Maintenance is even more critical as a property ages. Ignoring maintenance can lead to costly repairs and even safety concerns that worsen exponentially over time. If ignored too long, it can negatively affect property values.
  • Increase HOA dues as the community ages. The older a community, generally the more expensive it is to maintain. Schedule smaller, annual increases rather than waiting for an emergency and trying to push through a large increase or assessment. An unexpected increase or assessment can result in angry and unprepared owners – and strained relations with the board as well as a tarnished reputation for the management company.
  • Just having a reserve study and account isn’t enough. You still need to make the prescribed repairs and do the maintenance, as well as fund the reserve account. Build these costs into your annual budget and be transparent with your HOA members.
  • Communicate with HOA members. Keep your members informed about future needs and the amount of wear and tear on community property. If the reserve fund isn’t sufficient to cover necessary projects, detail options for funding the repair and make sure it gets done. Waiting won’t make the situation go away or save money, but instead likely lead to higher costs and additional repairs.
  • Have an annual audit or other type of financial review. An audit takes a close look at the reserve study and account, and compares funding to expenditures. Even if not required by statute or your HOA covenants, an annual audit or other financial review is a good idea.
  • Ensure the HOA and board have sufficient insurance coverage. Every board member inherits the mistakes of past board members, which makes good insurance coverage even more critical. In addition to liability and property damage, make sure your HOA also carries directors and officers (D&O) insurance. D&O generally covers board members when legal action arises from performance of their board duties.

Learning Lessons from the Surfside, FL Disaster

Hopefully, the Champlain Towers South tragedy is likely to lead to legislative and other industry changes. Here are a few being discussed:

  • Required reserve studies for common property and buildings
  • Mandatory annual financial audits that cannot be waived by a membership vote
  • Specific disclosure of building maintenance issues in audit reports
  • Updated building codes and more proactive enforcement
  • More vigorous insurance verification upon policy renewal

It’s natural to want to avoid conflict and to appease residents’ pleas for keeping fees low, saving money by not consulting an expert, or delaying maintenance and repairs. These actions can have disastrous outcomes, as the Champlain Tower South tragedy shows. Regardless of any new regulations, a sound financial strategy is to instead always follow best practices when it comes to reserve studies and funding.

If you have any questions about reserve studies, funds, annual audits, or other HOA accounting issues, contact us. We can help.

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