Reserve Studies

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.

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* 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.

Should Board Members Receive Compensation?

This question is posed to me again and again:  why, if a board member spends his/her personal time to do association business, cannot he or she be compensated for that time?Both ORS 94 and 100 provide that the bylaws for an association should include any compensation for the directors.  In my experience, though, the bylaws as written do not allow for any compensation to directors (that is, renumeration for their time and effort).  So why, if ORS 94 and 100 do not outright ban compensation to directors, do the documents almost always do so?  I believe that the primary reason that HOA and condominium board of directors are not compensated for their time is due to the fiduciary duty each director is obligated to observe.  Directors owe fiduciary duties of fair dealing, good faith and loyalty to the association.  If directors are getting paid for their time, then there is a question about whether or not they are acting in good faith or only in their own self-interest.What if a director is not compensated in cash directly but instead in some other form?  Even if the board members are simply not required to pay their dues, this is indeed compensation and I would argue is in direct violation of their fiduciary duty.  After all, that lack of income will result in a budget shortfall, and allowing a known reason for a budget shortfall is not acting in good faith.

I’m sure some will argue as to why any owner would want to serve on the board without compensation.  The reason, besides the annoying answer that “It’s the right thing to do,” is that board members get to make 95% (or more) of the decisions for all owners in their community, and those that serve on the board should be motivated by knowing they are making the best possible choices for the benefit of all members of the association, including their own.  Serving on the board is also the absolutely best way for an owner to understand the inner-workings of the association and seeing the struggles and challenges to be faced.  All owners should take a turn at serving on their boards at some point during their tenure in that community.  It does mean giving up some free time, but having a properly running community can be well worth it.

So compensation for board members?  Unlikely.  Owners should serve on boards for the experience and to keep their community running smoothly and properly.  Seems like that should be compensation enough, no?

Wintertime Maintenance Planning (for Summer Maintenance Needs)

It’s raining in the Willamette Valley today (and it has been for a week).  So it’s hard to think about those glorious, sunny days to come later in the year, but now is the time to start planning for just such a time.  Why?  Well, for many maintenance responsibilities, the best time to undertake them is when the weather is most conducive.  Sure, roofs can be replaced in the rain, but it’s not when most of us would recommend the work be done (unless, of course, there’s no other option because it’s raining inside your building!).  Likewise would you want your windows washed in the rain?  Probably not.  But now, in the midst of this wet weather, is the perfect time to plan for the association’s maintenance needs for the year.The governing documents for each association delineate items that are the responsibility of the association to maintain, repair and replace.  ORS 94.595 and ORS 100.175 require associations to obtain and annually update a reserve study, which is to include those items over the next 30 years (there are some caveats to this for very small condominiums or developments created before 1999).  Statute also requires a maintenance plan to be developed, which should work in conjunction with the reserve study to help an association plan for and undertake its maintenance obligations.  These are the best places to look when planning the maintenance strategy for next year.

Maintenance Plan.  At a minimum, the maintenance plan is to include a) descriptions of the maintenance to be conducted, b) include a schedule for the work to be done, c) be appropriate for the size and complexity required, and d) address issues including warranties and the useful life of the items (per statute).  The most practical format I’ve seen this in is a one page (for simple associations) calendar that shows what month each item should be undertaken in.  There are many other formats, but as long as it has the information it’s acceptable.  These are the first items that should go on the list of obtaining request for proposals (RFPs).

Reserve Study.  It’s also important to take a look at your reserve study to determine which larger projects need to be completed this calendar year.  This is not the time for the board to decide they do not want to take on a particular reserve item this year; if it’s on the reserve study for 2012, the board has an obligation to undertake it unless they receive compelling evidence that the work can reasonably be delayed (for example, two of the three painters who provide bids for the work tell you the current paint is still in fine shape; that might be an authentic reason for delaying another year or two, but then that change needs to be reflected in the updated reserve study).  Better yet, if the board thinks there are fallacies on its reserve study, the time to correct that is before it’s been accepted for the new year.  Take whatever reserve projects are listed as being accomplished this year and also put them on the list.

Other Maintenance Tasks.  There may be maintenance tasks that are not specifically called out in the governing documents but the board may consider undertaking for the greater good of the association.  The board should determine (and consult with their attorney, if there is any doubt) if there are such items and also include those on the list.  The board should also consider whether or not these “missing” items should be included in the maintenance plan or reserve study in future revisions.

Once the list is together of the maintenance needs for the year, written RFPs should be completed.  Remember, the more detailed and comprehensive, the easier it will be to determine if the bidders are providing “apples to apples” figures.  At a minimum, the RFP should include:

• Name of the Association
• Date the RFP is Sent
• Physical Address of the Association (also consider including a map, if the community is large or confusing in any way)
• Desired Timing of the Job (March, Summer, etc.)
• Deadline for Returning the RFP
• Contact Person for the RFP and Several Contact Methods (minimum two phone numbers or a phone number and an e-mail address)
• Specifications (this should include things like the number of items or buildings, products desired to be used, etc.  Remember that the more detail you provide here, the easier it will be for the bidders to bid on the same job!)

Also be sure that as part of the RFP package, bidders provide their licenses and insurance.  Association’s don’t need to take on the liability of an under- or uninsured vendor working on their property.

I recommend that bidders be given at least two weeks (but not more than 30 days) to get their proposals turned in.  This gives the board plenty of opportunity to review the proposals at the next board meeting and if there are any questions or negotiations that need to be done, there is still plenty of time to undertake those before the work needs to be completed.

Now is the time to get prepared for the maintenance obligations for the year.  By taking the time to get everything ready and lined up now will allow the board to focus on more critical and time sensitive issues throughout the rest of the year.

Welcome to My Blog!

The intent of this blog is to provide straightforward, clear information for board members and owners in community associations in Oregon.  In addition to routine information, I also intend to provide less obvious information and experiences that I think will be helpful for owners and boards.

Let’s talk about the phrase “Community Association” and what it means. In the State of Oregon, there are three community association types, only two of which I’ll deal with on this blog: condominiums, planned unit developments, and timeshare communities. Since I’ve not dealt with timeshares, this blog will deal exclusively with condominiums and planned unit developments, both of which are also commonly referred to as HOAs.

There are three statutes in the State of Oregon that are applicable to community associations:

ORS Chapter 65 - Nonprofit Corporations
ORS Chapter 94 - Real Property Development
ORS Chapter 100 - Condominiums

All of these statutes are available online:

http://www.leg.state.or.us/ors/065.html
http://www.leg.state.or.us/ors/094.html
http://www.leg.state.or.us/ors/100.html

All community associations must follow ORS Chapter 65, regardless of whether or not they have been incorporated.  Then, depending on the type of association, they must also follow either ORS Chapter 94 (for planned unit developments, also known as PUDs) or ORS Chapter 100 (for condominiums).  With very few exceptions (and those generally being very old communities), the simplest way to determine if your community is a PUD or a condominium is by looking at the legal name:  if “condominium” or “condominiums” is in the entity’s legal name, then your community is a condominium and follows ORS 100; otherwise it is a PUD.  Some owners mistakenly believe that it is possible to tell simply by looking at how a community is constructed or by the items maintained by the HOA to determine the community type, but that is not the case. I have managed condominiums that were all single-family, detached homes (and the HOA had no maintenance responsibilities for those homes) and I have managed PUDs that were entirely responsible for the exterior of the home.  If  in doubt, consult your attorney to determine whether your community is bound by ORS 94 or ORS 100.

There are many important items that boards must follow in these statutes, so I generally recommend, especially if a community board is mostly or completely self-managed, that each board member have a copy of the current statutes in a notebook or other easy to access location.  As a community manager, I find myself frequently reaching for statute to ensure I  am providing proper guidance.  It is critical that board members follow statute as well as the governing documents for the community; these should be thought of as the three most important documents in your possession.

What’s in these statutes that is so important?  Truthfully I could discuss any number of the provisions that I’ve found boards either don’t know about or don’t understand, but one of the biggest ones that I have seen (usually unintentionally) missed has to do with open meeting laws.  In the State of Oregon, all board meetings are open to owners.  That does not mean that owners can take over board meetings and interrupt whenever they want, but it does mean that they have the right to be in the room and listening to the discussions and decisions being made.  These meetings require proper notice to all owners (which could be as simple as posting a notice at least three days before by the mailboxes or setting out a A-frame sign with the meeting details) and should be held in a location that is near the community and is easily accessible to all owners.  Board members cannot by chance (or intent) thwart holding board meetings or discussing business outside of those meetings.  For example, let’s say your three member board all shows up independently (but at the same time) at the local Starbucks and you begin discussing the proposals for gutter cleaning.  Whether or not a decision is reached, this case is a DIRECT violation of the open meeting laws.

Board members should also use great caution when discussing HOA business via e-mail. While e-mail can be a great tool, it also should not be used to circumvent holding open board meetings. I recommend that boards primarily use e-mail to distribute information, set meeting times/dates/locations (if these are not set in advance), and otherwise wait for the meeting to discuss or consider the items before the board.

For more information about the open meeting laws, please refer to ORS 94.640 or ORS 100.420.

Statutes can (potentially) change with every legislative session, which will now be every year.  So it is prudent for boards to follow the changes and understand how the changes may affect them.

How can you find out about changes to the laws?  There are educational opportunities for board members who would like to know more about community associations, including the laws.  One of the best sources is Community Association Institute (CAI), which has chapters nationwide.  The Oregon chapter, known as CAI-Oregon, holds luncheons at the MAC to discuss and explain changes in the laws and a variety of other important information about HOAs.  October’s presentation was called “Nuts and Bolts of Rules, Fines, and Effective Enforcement.”  You can find out more about CAI-Oregon at its website:

http://www.caioregon.org/link/linkshow.asp?link_id=232780

The next luncheon will be held in January.  In addition to the luncheons, classes are also held at other times throughout the year to provide board members more educational opportunities.

To recap on today’s blog:  1)  obtain a copy of ORS 65 and either ORS 94 or 100, depending on your community type; 2) read and understand how the provisions of these statutes affect the board and the community; and 3) if in doubt, consult your community manager or an attorney that specializes in community associations.