Reserve Study Timing: New Reserve Studies
Associations that do not have a reserve study might be questioning whether they should wait to conduct a reserve study until things settle down. An association might be brand new and consider waiting because large projects are years in the future. Other associations may have just never had a study conducted. In both situations, there is no better time to conduct a reserve study than as soon as possible. Let’s recall the core philosophy of conducting a reserve study. Boards want to capture a fair contribution to their reserve fund from existing homeowners for the consumption of existing assets. For this reason, the sooner the better when it comes to determining what that contribution should be. Most associations without a reserve study plan are underfunding. Waiting until things settle down allows another year to go by without collecting a fair reserve contribution from existing unit owners for the useful lives of the assets they are using. With every passing year an association becomes more significantly underfunded. An accurate reserve study can still be conducted in today’s economic environment. A reserve study isn’t perfect but it is certainly exponentially more accurate than what an association would reserve without one. In addition, the longer you have to reserve for future expenditures, the lower your reserve contributions will be. Associations who have 15-years before a roof replacement have a much more palatable funding plan than associations with 5-years before a roof replacement. Don’t delay your reserve study planning.
Reserve Study Timing:
Updating a Reserve Study Association board members with a prior reserve study might be asking themselves when they should conduct their update. Should they wait until things settle down? Should they update their study early because costs have increased on so many projects and they are worried they are underfunding?
Every association will need to consider its situation individually. That examination should start by looking at your previous reserve study. If your previous reserve study is 5-years old, it’s due for updating based on that alone. Lending requirements and underwriting scrutiny for condo mortgages have significantly tightened with regard to reserve funding. A lender isn’t
going to dismiss wanting to see a current reserve study because of current economic uncertainty. To the contrary, with a looming recession likely, lenders will be more interested in your association’s reserve plan.
If your prior study is less than 3-years old, look at your expenditures forecast. Do you have any major projects coming up in the very near future? If your large projects are still 5, 10, or more years in the future, it’s almost certain the economic turmoil of 2022 will have subsided and stabilized. Many project costs will return to a more historically realistic level. The inflation spike of 2022-2023 might have come and gone with little-to-no effect for your association by the time your cost intensive projects occur.
On the other hand, if your association had to undertake large projects this year, or has a large project planned for 2023, you may want to update your reserve study in the near-term. If your roof project for this year came in 30% higher than planned, you have almost certainly overspent the reserve funds collected for the consumption of life of the prior roof. Stated differently, if you blow your budget, it is wise to make a new budget, not to decide to avoid budgeting. You will want to update your study to make sure you are properly reserving moving forward.
Keep in mind that even without inflation and supply chain issues, many associations choose to make upgrades at the time of replacement. Developer grade fixtures or carpeting are replaced with much higher quality (more expensive) finishes. Referring again to the core reserve study philosophy, it wouldn’t have been fair to assess prior unit owners higher fees for years for upgraded finishes they never got to enjoy. However once upgrades have been made, unit owners are enjoying nicer finishes and an updated reserve study will begin to collect higher fees corresponding to the cost of consumption of life of the newer assets unit owners are now enjoying.
Regarding reserve studies in turbulent times, common sense would apply. Economic volatility more often necessitates more frequent planning. If economic conditions had remained very stable and predictable a prior reserve study would likely be viable for longer since things followed historical averages. At the end of the day, inflation and economic turmoil aren’t reasons to delay reserve planning. If anything, in many cases, it’s a reason to shorten the time between reserve study updates.
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