THE VIRGINIAN-PILOT
Copyright (c) 1996, Landmark Communications, Inc.
DATE: Saturday, November 2, 1996 TAG: 9610310234
SECTION: REAL ESTATE WEEKLY PAGE: 02 EDITION: FINAL
COLUMN: Common Ground
SOURCE: G. Robert Kirkand and Michael A. Inman
LENGTH: 84 lines
Our accountant is insisting that we have something called a ``reserve study'' done for the association. He says that he can't complete this year's audit without this being done.
What is this study? Why do we have to have it done? What happens if we don't?
There are very few issues that are causing more concern for association directors than this one. A ``reserve study'' is an analysis of the physical property owned by the association.
The study not only identifies the property, it clarifies its remaining life and replacement cost.
Many associations have more property than they realize. Not only are there roofs and siding, but the light fixtures, pumps, motors, sidewalks, driveways and many other items too numerous to list. One schedule of reservable items we saw listed over 200 components of the buildings.
Once the list of the property is determined, each item is examined to determine its remaining useful life and replacement cost. This is done to establish how much money the association should be setting aside each year.
Once the study is complete the association should review carefully the report to ensure that the board of directors has established a sufficient reserve fund.
Different standards are used to establish the threshold at which you begin to reserve for a particular item. However, all the standards establish that the item must have a life of more than one year and cost more than a base amount. We have used three years and $1,000 as a standard.
Reserve studies should be done by a qualified professional. As with the home inspection services, it is important to establish that the firm or individual performing the study is both qualified and experienced.
We prefer that studies be done by licensed architects or engineers, for two reasons. First, they tend to have better knowledge and experience in determining the information required. Second, they offer the association an assurance that the information is accurate and reliable. Price should not be the only criterion on which an association makes the decision.
The consequences to a board of directors fall in two areas.
First, no board should ignore the recommendations of the reserve study. Failure to budget adequately is a clear breach of fiduciary responsibility. This means that the board could be held responsible for any shortfall of funds.
Second, the failure to get a reserve study done could have the same result, plus your accountant may be unwilling to give you a clean audit report and require an explanation to be added to the audit.
Either way the board's only choice is to have the reserve study performed and then updated every three to five years.
These three professional all agree on the importance of doing a reserve study.
According to David L. May Jr., AIA of CMSS Architects, ``only about one in three of the community associations in this area are having a proper reserve study done. Those that are doing them are generally not updating them as often as needed. What happens in five or 10 years when the association needs the money to pay for a major repair and the money is not there? The association can end up with a large special assessment which can depress property values.''
Ron Pittser, PCAM, CMCA of PMI Management says ``the importance of having a full study done by a qualified professional is critical to the financial health of an association. The manager is too often asked to prepare the reserve schedule. It requires the professional expertise of the engineer or architect. Always use the professional.''
Mark DesRoches, CPA, who specializes in accounting for community associations report. ``Most of the associations are not properly funding their reserves for one of three reasons. Either they do not have a reserve study, they are using an out-of-date or inadequate study or they have chosen not to follow the recommendations of the professionally prepared reserve study.
Regardless of the reason the association's reserves ends up underfunded resulting in either special assessments or delayed repairs.'' We strongly recommend that all boards take your accountant's advice. Have the study done and follow the report's recommendations. It's your duty. MEMO: G. Robert Kirkland, president of a Virginia Beach property
management consulting firm, and attorney Michael A. Inman specialize in
Virginia community association issues and are affiliated with the
Southeastern Virginia chapter of the Community Associations Institute.
Send comments and questions to them at 2622 Southern Blvd., Virginia
Beach, Va. 23452. To submit questions by phone, call 486-7265; by fax:
431-0410; by E-mail, grkirkland(AT)aol.com by CNB