THE VIRGINIAN-PILOT
Copyright (c) 1995, Landmark Communications, Inc.
DATE: Saturday, October 28, 1995 TAG: 9511020577
SECTION: REAL ESTATE WEEKLY PAGE: 28 EDITION: FINAL
COLUMN: Common Ground
SOURCE: G. Robert Kirkland and Michael A. Inman
LENGTH: Medium: 85 lines
I am both the treasurer and chairperson of the buildings committee for my association. As a result I am having an argument with the other board members about reserves for future repairs. There are three sides on this issue.
One group says we do not need the reserves and repairs should be budgeted when needed and not before. The second group says we should determine what the requirements or reserves are and put some money away as surpluses permit.
The third group says determine the amount that needs to be reserved and set it aside as part of the budget every year. Which approach is best?
It is obvious that some of the board has not been reading our column as we regularly state that you need to determine the reserves and set them aside each year. There are few ways that a board can get into worse trouble than by not putting aside the needed money in the reserve.
There are several ways to determine how much money is needed for reserves. The first way is to research your legal documents and they may require that you set aside a certain percentage of the income each year.
This is absolutely the worst way of determining the needs. At best the percentage should be treated as a minimum requirement.
The second way is for the board or manager to determine what common elements you have, how much of them you have, the life expectancy, etc. With this information you can call contractors and other sources for inspections to determine remaining useful life of materials and the cost of replacement.
The third and best way to set the reserve level is to hire a qualified architect or engineer to do a reserve study. Base on their professional experience and other resources not readily available to the association, they can set a reserve schedule for the association to use.
The architect will gather all the necessary information on your buildings, grounds and components such as roofs, streets, pools, etc. and establish the schedule based on estimated life expectancy and replacement cost.
With this information in hand, the association can determine which items actually need to have reserves. Typically this will include roofs, streets, painting, major mechanical systems, pools, elevators, building siding, fences, etc. Not every thing that is identified by the architect will need to have a reserve.
For example, one recent study included all the outside porch lights. The association knew that it was replacing about 10 of these a year at a cost of $20 apiece. Even though the overall cost is high the annual costs did not merit a reserve.
According to David L. May of CMSS Architects: ``If prepared properly, a reserve study will serve as a valuable tool for property managers as well as the community association. Reserve studies are one of the most important factors in establishing and preserving the property for the eventual resale of the individual owner's units. And that is not blind faith. It's a practical necessity.''
Generally if an item has a life expectancy of more than three years and cost more than $3,000 to replace, it is a good candidate for a reserve.
If the association then incorporates this information into their budget process, they should have a good estimation of how much they need to set aside each year.
The formula will require the current cost to replace, the inflation factor, the number of years of life left, how much money is currently in the bank to replace this item and the interest rate earned on the savings.
The calculations should be revised each year to reflect actual conditions. Also the study should be redone every three to five years to make sure that no unusual conditions are impacting on the monies needed.
It is critical for several reasons that associations do proper evaluation and funding of reserves. First, it is a way for every owner to pay his fair share of the costs. Second, it ensures that there will be sufficient funds for the repair when it is needed.
Third the association will avoid great fluctuations in assessments as various items need to be repaired, which always tends to upset a number of owners.
Last, but certainly not least, it ensures the marketability of the unit. Many lenders today are looking very closely to ways in which associations fund their reserves. If they feel that the money is inadequate, they will refuse to approve a mortgage for a new buyer. MEMO: G. Robert Kirkland, president of a Virginia Beach property management
consulting firm, and attorney Michael A. Inman are affiliated with the
Southeastern Virginia chapter of the Community Associations Institute.
Send comments and questions to them at P.O. Box 446, Virginia Beach, Va.
23458. To submit questions by phone, call 486-7265; by fax: 431-0410. by CNB