Reserve Studies: A Crucial Tool for Utah Associations

A couple months ago, Brian Webster, the Controller for SunWest, contributed an article about reserve studies. In Utah, every Association is required to prepare, or have prepared, a reserve study. And, the study is to be updated every few years with current information. We had a few questions from our readers, plus we were a little curious, so we caught up with Brian to dig deeper to answer your questions and talk about the importance of reserve studies for Associations.

What is a reserve study?

Brian: There are a few key components to a useful reserve study. First, the study catalogs all the Association assets. Then, an estimated useful life and value of each item are assigned. Finally, schedules to repair, replace or refurbish each asset are provided, along with a funding plan to cover those expenses. A typical reserve study will look at these obligations over the next 30-year period for the association.

Why? Besides the State requirement to conduct a reserve study, why is it useful?

Brian: This assessment is extremely helpful because it is forward-thinking. It allows the Association to know the amount of money to set aside in a fund for future needs.

How does the Association determine how much money to set aside?

Brian: That depends! I suppose what it comes down to is the specific association’s tolerance for special assessments. If a particular association doesn’t mind planning for, or the risk of, special assessments, then they will tend to fund reserves at lower levels. However, many associations are risk adverse and want to fund reserves at higher levels. This way they plan to avoid special assessments.

What’s your opinion about how much associations should be setting aside? How do you advise the Boards you work with?

Brian: Again, it depends. For Utah, the statute is clear: preparation of a reserve study is required. However, the amount of funding is not legislated. I think this provides the right amount of flexibility for associations to govern themselves. In considering the amount to save in reserves, my consistent piece of advice for board members is to balance the amount of obligation between current residents and future residents. There is some legal precedent in the industry where incoming residents have moved in and faced special assessments; they have successfully sued their association for not saving enough in years past. So, I do not recommend a board neglectfully defers savings, just to keep regular assessments low today. Personally, I think the right balance is to have enough saved (remember to take any planned future contributions into consideration), to meet all anticipated reserve item needs for the next 30 years, plus some agreed upon amount, that acts as a buffer against the unexpected. This type of approach seems to be fair to both current and future residents.

You mention saving enough for all anticipated reserve items. What type of unexpected items pose risk for an association and its reserve fund?

Brian: First, most catastrophic loss can be mitigated with all the proper insurance coverages. Association officers and managers should work closely with their insurance professional to bind the appropriate coverages. Specific to the reserve items, risks include factors such as an item wearing out sooner than expected, the price for an item increasing more than assumed, or a change in technology that requires a larger expense or replacement of multiple items. In a community we managed, all the wireless microphones had to be replaced early because a cell-phone provider purchased the frequency their mics used. The devices still worked, but the technology suddenly became useless. If all the estimates in the reserve study can average out, then big picture, the association is in good shape. So, our approach to reserves is to be a little conservative. If an item has a 3-year warranty, and is expected to last 5 years, we might suggest a 4-year useful life. This way, there’s only one year after warranty before the reserve plans to replace the item, but it’s likely for the item to last longer and funds can be there, available, but not used until needed.

What else? Budget season is approaching for Associations, what else should they consider about reserve funds?

Brian: Really, I think clear communication is the key. When boards and managers clearly set the expectations for residents, then everyone is on the same page. Frustration comes into play when a resident can say, “I didn’t know!” So, if you are in an association that is saving lots of money to avoid special assessments, talk about it. ‘Hey, this is why assessments are higher, we are saving like this...’. Or, if you are in an association that is planning on having a special assessment in 5 years, talk about it - now. Whatever the case, make sure everyone is on notice so frustration can be avoided. In my experience, the sense of community is preserved and promoted when finances are clearly communicated!

We want to thank Brian for sitting down and answering our questions! If you have any further questions about reserves or other ‘association living’ topics, please let me know. I would love to gather pertinent info from the right professionals.

Good luck to all the boards, committees and managers working through budgets this time of year. Here’s to properly funding your reserves and carrying out all the operations of your associations!