Oregon Statutes 94 and 100 require boards of all but the oldest condominiums and planned unit developments to, “annually... conduct a reserve study or review and update an existing study to determine the reserve account requirements” (ORS 94.595(3)(a) and ORS 100.175(3)(a)). But what is a reserve study, who can do one, and it is really that important?
What is a reserve study? A reserve study is essentially a financial planning tool, a roadmap for the board to follow. When done properly, it provides a way for the board to ensure sufficient funds will be available to fund major maintenance, repair or replacement of all items of common property* that will normally require such work over the next one to 30 years.
While there is no one proper format for a reserve study, each one should, at the bare minimum, have the following:
a. Listing of common property/items of HOA maintenance responsibility. This list should include the item, its year of installation, its anticipated lifespan, and the cost for this item at the end of its useful life.
b. Listing of reserve income/expenses from current year through year 30. This is usually a spreadsheet with income for each year as well as reserve expenses for each year, with a total showing the net anticipated balance at the end of each year.
There are many other items that may be included with a reserve study. These typically include definitions of terms, assumptions about inflation, interest or other income, written evaluations of the components by the experts who assessed them, and sometimes also photographs and detailed information about each common property item. In addition, most reserve studies also include a maintenance plan.
A maintenance plan is a critical component of a reserve study. While it is not required to be updated annually, it is intended to be used in conjunction with the reserve study to help the reserve items last for their anticipated lifespans. To give an example, let’s say the roof on your building is expected to last for another 25 years. To help ensure that the roof actually lasts that long, the maintenance plan will call for periodic (probably at least annual) inspections of the roof and the removal of moss, cleaning of gutters (to avoid water backing up under the roof), etc. Failing to clean the moss off the roof may not only void any warranty it has but will certainly shorten its lifespan.
Who should perform a reserve study? Statute does not currently specify who may or may not produce a reserve study, but that does not mean that the board should just hire anyone. Since the reserve study is a financial planning tool, it should be done by someone with knowledge of the maintenance, repair and replacement needs of the association’s common property or someone who has experts who can provide this knowledge. Experts would include individuals/firms with the Reserve Specialist designation, a professional designation from Community Association Institute, the national community management organization (to learn more about this designation, please see: http://www.caionline.org/reservespecialist). There are several local reserve study providers who have this designation; follow this link for more information: http://www.caioregon.org/Reserve-Studies-~232872~17084.htm.
Board members sometimes ask about self-performing reserve studies. Even if one or more of the board members has construction/maintenance industry experience or education, it is not prudent for the board to try to take on this responsibility themselves. There is simply too much potential risk if an error is made. In good conscience, I cannot recommend it.
How important is it to update a reserve study every year? Actually, it is extremely important that the reserve study is updated annually, and not just because statute says so. The reserve study is a snapshot of the reserve income and expense over the next 30 years, and so each reserve study has a different window of 30 years. So the 2011 reserve study should show income and expenses from 2012 through 2032, while the 2012 one shows 2013 through 2033. If there is a big expenditure that happens in 2013 (say the roofs need to be replaced that year) and the board only relies on the figure from the 2011 budget (which doesn't show that big roof expense because it’s not required to since it happens in 31 years), the board is going to find itself seriously underfunded when it has to replace the roofs or whenever it does update its reserve study. If the study had been updated in 2012 and the roof expense caught, the board would have much more time to consider how to get their funding to the proper level. Even though it’s not an insignificant expense to have a reserve study prepared, it’s a small price to pay in the long run to help ensure the community has the proper funds to do what’s needed and avoid special assessments.
One final thought about reserve studies: boards shouldn’t wait until they’re trying to put their annual budgets together to have a reserve study done. Boards should plan to have the reserve study in hand at least four months prior to the beginning of the fiscal year (so if the fiscal year is the calendar year, that means by September 1). Waiting on a reserve study to determine the amount to contribute to the reserves for the next year may delay the adoption of the budget, so the board should even consider contacting reserve study professionals now for quotes and getting the ball rolling for next year.
* The term "common property" is being used to designate any items within the community that the association has maintenance responsibility over, regardless of who actually owns the item.