Reserve Studies: Think Backwards To Go Forward

BY ROBERT W. BROWNING, PCAM, RS

Fall is in the air and as our thoughts shift from summer vacations and ice cream to budgets, reserve studies and disclosures, what better time than now, to discuss tips for fast and easy reserve study preparation and adoption. We will discuss scheduling, working with your reserve analyst, and finally, dealing with those pesky disclosures, (which may include a little dancing on our part.) Why not start with scheduling, by suggesting a new technical reserve study term: “Backwards Thinking.”

Backwards thinking you say?

I guarantee backwards thinking will help you get your budget and reserve study adopted fast and easy. If you are a manager you may even get Thanksgiving off. Pick a date you want to mail the budget and disclosure packet to the association members. From there identify one or two board meetings before the mailing date (properly noticed of course,) where the board can adopt the budget and reserve study. From there, decide when the finance committee (FC) will need to adopt their recommendation for the board (if the association has a finance committee,) and from there calculate backwards how long the FC will need to work on the budget and reserve study draft.

Is this starting to make sense? After you have the FC schedule in place, identify the time the reserve analyst will need to do either a site-visit study (more time) or an update without site-visit (less time.) Now you simply need to have the reserve study ready for the FC and work backwards from there to get the study done in time for the FC and/or board. Continuing backwards, determine how long the reserve study will take, depending on the level of service of the study, and pick a date for the reserve study contract to be adopted by the board and have the reserve study proposals available for the board by the board meeting, a month or two before you need the reserve study draft. Whew! That is a lot of backwards thinking and for this year it may be too late, but this will definitely work for you next year.

Something to think about if your association has a fiscal year-end other than December. You can save dollars on your reserve study if you use the backwards-thinking method! Many reserve analysts are buried with work June — November since most associations have December year-end fiscal years. If your association has, say a June fiscal year-end, ask the reserve analyst if there is a discount available if the contract engagement is during December – May. You have nothing to lose and the reserve analyst will be happy to have their workflow spread more evenly throughout the year.

“Backwards thinking” will help to ensure the budget and reserve study are adopted by the board after a thorough and contemplative review process. This is important, especially in these economic times, both in terms of reserve component costing and the loss of assessment revenue for some associations due to the economy. In addition, there are forces at work slowing down the reserve study process and the reserve contribution is the single biggest line item in most association budgets.

The first issue that may slow down the process is a change to the Davis-Stirling Act a few years ago. This change stipulates the reserve funding plan shall be adopted by the board of directors at a meeting under the Open Meeting Act. In addition, 1365.5 {5560(c)} goes on to say, “if the board determines that an assessment increase is necessary to fund the reserve funding plan, any increase shall be approved in a separate action of the board that is consistent with the procedure described in Section 1366 {5605}” (again compliance with the Open Meeting Act.) Simply put, to be safe, the reserve study should be adopted as a separate action by the board at a properly noticed meeting of the board of directors.

The second item that can slow down completion of the reserve study is the Assessment and Reserve Funding Disclosure Summary. Paragraph one discloses the assessment amount for the year for which the budget is being prepared. Since this number is usually adopted at the end of the budget process, the reserve analyst cannot execute this paragraph until the board has adopted the reserve study and the figure has been transmitted to the reserve analyst and the study is updated and sent back to the association. This three step dance as we call it (see I promised dancing,) even under the best of circumstances can take a few hours or a few days.

“Just send over the disclosures Bob, no need to update the entire study!” This common manager request is not possible because the disclosures flow from the current reserve study update. The disclosures are developed as a result of the reserve study. It is not possible to simply output the disclosures without doing the heavy lifting of updating the entire reserve study, first.

The third item slowing down reserve study preparation these days has to do with economic conditions. It used to be a rare occasion when a board member or FC member wished to meet the reserve analyst on site. Now it seems everybody wants a piece of the reserve analyst. Scheduling appointments takes time. Walking the community with even the most well intentioned association volunteer can slow down the process. Imagine if the roofer, attorney or CPA were asked if the volunteer could go watch them perform their job. It would seem an odd request, but often these days, folks want an audience with the reserve analyst. In most cases this is fine, and in some cases a valuable opportunity, but it does add time and may impact the reserve study cost as well.

Economic conditions are causing boards to look at different ways of dealing with reserve components. The following statements are often heard by all reserve analysts: “Is there a cheaper, better way to do the project?” “Lets get three bids for the reserve study costing!” “The reserve study costing seems high, lets get a bid from a contractor or engineer.” These are all valid concerns in reserve studies. Be aware these things can slow down the process. Economic conditions are also driving boards to look at several different funding plans. Running alternate funding options, adding in special assessments or bank loans to the funding plan, looking at different rates of contribution increases; these are all plausible for the board to deal with. But they do add time to the process.

What are other tips to help speed up the reserve study process? Communication is key between the reserve analyst and the manager. The reserve analyst needs specific information in order to be able to update the reserve study and prepare the proper disclosures.

For purposes of this article we will use the off year, Level III, Update Without Site-Visit Reserve Study as a basis for our example since this is by far the most common reserve study being performed in California. For the Level I, Full Study (which includes a site visit,) as well as the Level II, 3 year update with site-visit study, each reserve analysis firm will have their own specific detailed checklist of items needed.

Information needed by the reserve analyst to update the reserve study and prepare disclosures include the following items, (examples in parenthesis):

Start of the reserve study process

Last year-end reserve balance (12/31/2020 Audit, review or balance sheet)
Current year annual reserve contribution (2021 Budget)
Projected missed reserve contributions, if any, (with payback plan if available)
Reserve expenses since the last update was completed
Loan or special assessment information

After board adopts the study

Adopted reserve contribution (2022)
Total assessment amount per payment period (2022 monthly, quarterly or annual as applicable; this is the 3-step dance part)
Details of any adopted special assessment (needed for funding plan and disclosures)
Details of any bank loans with terms greater than one year (needed for funding plan and disclosures)

Once the reserve analyst hears back from the association that the reserve study (any type of study) has been adopted, the analyst will generally return a final study and/or the disclosures, depending on how many, and what kind of changes the board has made.

In the final reserve study packet will be several disclosures mandated by the Davis-Stirling Act. We do not have room in this article to detail why these disclosures are needed (see your attorney) but we can talk about how they should be presented. Most reserve analysts will prepare all of the disclosures mandated by the civil code and below is a list of the disclosures that must be in the annual board packet:

Assessment and Reserve Funding Disclosure Summary- This form which is approximately fifteen years old, has two pages of very detailed information related to the association’s reserves and assessments. For 2010 this form was amended to now include the reserve study projected interest rate and inflation rate. This is also the form as mentioned above that has, as paragraph one, the total assessment per ownership interest for the next fiscal year. This disclosure is also known as the “Laird” form for Assemblyman John Laird who authored the legislation giving us this disclosure.
Major component summary including current replacement cost, useful life and remaining life (bold type)
Percent funded calculation as of the end of the year for which the study was prepared (bold type)
Current deficiency in reserve funding, expressed per unit (bold type)
A statement explaining if there are deferrals of major component work along with the justification
Special assessment declaration
Loan disclosure if applicable
The mechanism by which reserves will be funded
Statement detailing procedures used for calculation and establishment of reserves
Reserve Funding Plan Summary with a statement that the full reserve study is available to any member

Budget packets are getting thicker by the year. As you can see above, there are at least ten disclosures or statements that must be in most budget packets. And this is only for disclosures related to reserves. Putting all of this together takes time and unfortunately for the manager, other parties like reserve analysts, are needed to assist in getting the budget packet completed.

Here is an important note about reserve disclosures in California. The Laird form’s addition to the annual budget packet, fifteen years ago, did not remove the obligation to disseminate disclosures that were in the Davis-Stirling Act prior to the Laird form’s existence. To add to the confusion, there is an overlap between the Laird form’s contents and those preexisting disclosures in Section 1365 {52xx}. Unfortunately there is not enough overlap in the two statutory disclosure areas in the Davis-Stirling Act to allow the association to only provide the Laird form in the annual budget packet. If your reserve analyst is providing the Laird form disclosure as the ONLY disclosure with the reserve study update, the budget packet will be deficient.

Be sure to seek the advice of legal counsel if there is any question as to what should be included in the yearly budget packet. There are many reasons why an association may need to revise or augment the reserve or budget disclosures based on special circumstances. In addition, if the association has received funds from a compensatory damage award or settlement related to design or construction defects, there are specialized disclosures needed in the annual budget packet that are best left to legal counsel.

You can never ask for the reserve study or reserve study update too early. In a worst case scenario, there may be an added revision needed at budget time if the manager orders the reserve study early in the year. Most reserve analysts will be grateful for work early in the year, even if it means providing a revision in the heat of budget season. You may even save money on the reserve study as well.

Remember, “Think Backwards to go Forward” and you will be eating turkey on Thanksgiving instead of calling your reserve analyst to check on the status of the reserve study.

Robert W. Browning, PCAM, RS is the owner of the Browning Reserve Group. He has served on the Board of Trustees of CAI and is a past President of CAI’s Foundation for Community Association Research. He has twice served as President for CAI-CNC.

Published in the Voice a publication of Community Associations Institute – California North Chapter. Volume 11, Issue 3. This article may be reproduced with permission of the Browning Reserve Group. Does your association need an article for their newsletter? Maybe we can help. Give us a call at (877) 708-0600 Toll Free.

7/1/2021 edits; example dates revised from 2009, 2010, and 2011 to 2020, 2021, and 2022, and revised California Civil Code, Davis-Stirling, section changes added {5560(c)}, {5605}, disclosure age from 5 to 15 years, and {52xx}to 1365.5, 1366, and 1365 respectively.