Money in the Bank – A Brief Q&A Session with a Professional Reserve Analyst

MONEY IN THE BANK

A Brief Q&A Session with a Professional Reserve Analyst

By Andrew Hay, CCAM-ND.PM

The primary purpose of a homeowners association is to protect, preserve and enhance property values. In California, the legislature understands the importance of this and requires that a reserve study be prepared every three years to help boards identify their largest liabilities – the major components they are obligated to repair, replace, restore or maintain. As managers, it is our fiduciary duty to understand the reserve study enough to help our clients with the budget decisions they make each year. I sat down with professional reserve analyst Ryan Leptien of The Helsing Group, Inc., ACMB to find out what managers are doing well, what we need to do better and what tools we can use to help our clients avoid dangers they might not even realize exist.

During the reserve study process, what do managers do consistently well?

Managers consistently stress to their clients the importance of a reserve study being prepared in accordance with the timelines required by law and to continue to make annual updates to the study in years a site inspection is not required. It is more common in self-managed associations for boards, through their own naivete, to not fulfill even the minimum legal requirement to have a study completed or fail to come back in the years a full study is not prepared to update to ensure accurate budgeting.

What can managers do to obtain more accurate reserve analysis for their clients?

Managers should encourage boards to obtain a professional specification for cyclical re-occurring projects (e.g. paint, fence replacement). Over time, applying the same specification increases the reliability of the useful life and cost history and it becomes much more valuable to the reserve analyst. In addition, managers can pay more attention to the detailed component list within the reserve study to help verify information such as confirming service dates, condition and location.

What do managers consistently not understand about reserve studies?

Managers generally do not understand funding goal concepts and risk management. Managers should be able to grasp the type of funding plan their clients follow and the risk associated with that path based upon current decisions. We typically see them more concerned with a current percent funded calculation and/or following a fully funded model without realizing that this model may lead to a greater amount of risk in future years. Following a threshold model might provide for more cushion in the critical year.

What are managers doing (or not doing) which contributes to their clients not funding properly?

Not understanding the items mentioned in last question does not allow them to offer and articulate alternative funding choices or to explain in clear terms the risk the board could be taking with some of their choices at the time the budget is being prepared.

What should managers provide to a reserve analyst to ensure the most accurate reporting for their clients?

The maintenance history is a very helpful tool that reserve analysts typically ask for, but rarely receive. Knowing the history and when major repairs and replacements were done in the past can greatly help the analyst make more accurate predictions for the future.

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6How can managers use the reserve study to help their boards budget responsibly?

Understanding and articulating to their clients that a reserve study is a budgeting tool. Also, explaining that the use of ‘funds’ in a reserve budget can help to alleviate expenses for operating line items that occur often but less frequently than an annual basis (long term tree care, bark replacement, concrete repairs, etc.).

7What is the most common cause of underfunded reserves?

Boards trying to “keep the dues down.”

8What are the dangers in having underfunded reserves?

The probability of special assessments in the future and an increase in costs to the association because of residual damage and premature wear out.

9What external factors do you see as threats for proper funding in the future?

The fact that materials, labor, inflation rates, weather and a host of other things not only can, but definitely will change. That is why a reserve study is required to be completed every three years and revised and adjusted annually. A key to soften the blow is to make those adjustments in a manner that is not economically harmful to the association.

Andrew Hay, CCAM-ND.PM is Director of the Management Division for The Helsing Group, Inc., ACMB, in San Ramon.

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