What is a Reserve Study? These studies detail the many components of an association building’s common elements.
By Ilyce Glink and Samuel J. Tamkin
Q: In our 60-unit building, our association board is reluctant to have a reserve study done for two reasons. First, the board members feel that they may have liability if they have a reserve study done and then work does not get completed. Second, depending on what comes up in the study, they don’t want to be forced to increase assessments.
Some owners will have problems paying any assessment increases. If an association does a reserve study and the board does not follow through on all or some of the recommendations, do the board members have a potential liability?
What is a Reserve Study?
A: In his representation of buyers and sellers in condominium sales, Sam frequently comes across reserve studies. What’s interesting about these studies is that they don’t usually state that everything wrong with the property has to be fixed immediately. These studies detail the many components of an association building’s common elements, assess the remaining useful life, and break down the estimated costs involved for the repair and replacement for various components.
How Does a Reserve Study Work?
Let’s say you live in a high rise building. There might be dozens of components listed in a reserve study. The report would detail everything from roof replacement, plumbing piping replacements, facade repairs, window replacements, to hallway carpeting replacement. Reserve studies do an amazing job breaking down the many components of a building. Then letting the association know what the authors of the study believe the timetable will be for repairs and replacements for each.
For example, if an association recently replaced its roof, the reserve study will note that and also indicate that the association should plan on replacing a 25-year old roof in about 25 years. They will also indicate what today’s cost for the replacement would be. And what they think it might cost in 25 years.
With this type of information, an association can start saving money today for future expenses it will incur. If the association chooses not to assess funds for future expenses, it will need to pass a special assessment in the future for any repair work that will need to be done.
Cost Effectiveness of Reserve Study
We believe it’s prudent for an association to clearly understand what needs to be done to maintain their property. No matter how big or small. But size matters when it comes to how much a reserve study costs. Certainly, a 350-unit multi-story building will spend more money to get a detailed report of what needs to be done versus a 3-unit association.
That said, it may not be cost-effective for a small association to spend $5,000 to $10,000 on a reserve study. That money might be better spent making the repairs or funding reserves. Also, in a small building, the owners can hire contractors to come out and evaluate the condition of various elements of the building. Whereas it’s much harder for individuals to do that in a 20-story building.
Your building has 60 units. That’s a good size building. An important question to ask is whether the building has undertaken necessary repairs and replacements in a diligent manner over the years. You should then ask the board or management company how much cash is in the association reserve accounts.
Maintenance and Reserves for Association
Based on your question, we suspect your building has some deferred maintenance and may not have much in reserves. But turning a blind eye on the building’s problems is not the answer. We think that having good information on the issue of what needs repairs and replacements in a building is critical. If the association knows what needs to be done and is taking care of those issues in a timely manner. You might not need to undertake a reserve study. But if the association board doesn’t really understand what needs to be repaired. And simply takes care of issues (or not) as they come along. That can be a source of liability for those directors.
HOA Make Sure Repairs Made in Due Time
When owners serve on a homeowner association board, they owe a duty of care to all owners of the building. We think that duty of care would include making sure that repairs and replacements are made in due time. What due time means could be subject to interpretation. The board should recognize that repairs and replacements must be made and have a plan for addressing those repairs. One way or another, those repairs and replacements will need to be done.
The board may push those repairs into the future. But if they know certain repairs need to be done but push those repairs too far into the future, that may put those board members at risk if something happens that harms an owner or visitor. Understand that the board members could be held liable whether they fund a reserve study or not.
Waiting to Due Imminent Repairs Hurts in the Long Run
Your homeowners association board should consult with reserve study consultants and their attorneys to understand the specific risks and liability they may face. Each property is quite different. But if your association board has a reserve study in hand that states there are repairs that must be made imminently, and they ignore the warning and do not move forward with the repairs, that could cause a much bigger problem down the line.
Associations that turn a blind eye to must-do repairs because they don’t want to raise assessments will likely face, at some point, a reckoning. At that time, unit owners will face significant expenses to catch up with the many years of low assessments and the many repairs and replacements that were deferred. All of which could make the property much less attractive to future buyers, causing values to drop.
And that will make everyone unhappy.
If you have long-time owners who can’t afford higher assessments, that’s unfortunate. But, you can’t allow those owners to keep a property from making necessary repairs. That’s unfair to everyone else.
©2022 by Ilyce Glink and Samuel J. Tamkin.