Two weeks ago,,  we shared five focus points to help you analyze property components. Last week, we offered another five, which were practical considerations to discuss with your reserve analysts in order to estimate project expenses as accurately as possible. To recap, we’ve covered:

1. Engineering Study for Stuff You Can’t See
2. Elements Impacted by Code Compliance
3. Piping Systems
4. New Construction Technology
5. Underground Piping and Wiring
6. Project Design & Management Expense
7. Logistics for Limited Access Projects
8. Collateral Damage
9. Items Outside Study Period
10. Strategic Improvements

We close out the series with the last four nuggets. These cover areas where the Board has a level of discretion and help you deal with some thorny cash flow issues.

11. Interior Renovation Upgrades: Interior renovations can take many forms. If you don’t tell your analysts what you have in mind, they are left to guess. For instance, I helped one client to plan for wallcovering, painting and lighting that would last through two cycles of carpet. In another case, the whole lighting plan was to be revised. That specific data had to be plugged into the reserve study.

12. Alternative Funding Options: If the community is behind the ball financially, debt service, special assessments, or a combination of the two might be options to consider. Clarifying the Board’s authority to do either and strategically planning to communicate options to members are absolutely crucial. This will no doubt be the subject of a future blog. Your reserve analysts should be able to help you to run “what if” scenarios, but you are going to have to tell them what those options might be.

13. Big Trees, Drainage & Other Landscaping: I’ve heard arguments that greenspace does not belong in reserve studies. However, mature trees and landscaping can be really expensive to remove, not to mention replace. Over time, surface drainage can become ineffective and might even lead to flooding. A review by an arborist, landscape designer or architect can be a real eye-opener. You can consult with your reserve analyst and auditor to confirm the appropriateness of including such items in the replacement reserve. If it gives either of them heartburn, you have an option. See #14 below.

14. Major Periodic Maintenance: I regularly see five-year electrical panel and switchgear maintenance in reserve studies. I even see the cost for future reserve studies in some reserve schedules. Even though these expenses may not pass the test as a reservable component, it makes sense to flow the funding evenly from year to year. Including such expenses in the operating budget could have significant impacts on fees. The fact that it’s on a schedule and in the financial plan helps Boards to maintain the discipline to actually tackle these vital projects. Depending on the property there might be other major periodic maintenance that is just as vital and has a similar financial impact. Hydro-jetting of plumbing stacks and laterals, dryer duct/vent cleaning, HVAC duct cleaning, and chimney inspections and cleaning can add up. There may be a couple of approaches to consider. If the property can be divided up with a portion of the work done each year, it would flatten out the expense. But if that’s not feasible, you might ask the reserve analyst to include such projects in the study. If the analyst (or the auditor as noted in #13) or the Board is uncomfortable with that approach, there is an option. You can create an operating reserve, set up a schedule of expenses, and calculate a monthly contribution to that reserve in the same manner as the replacement reserve. This will make sure the money is in the bank, keep you from deferring critical preventive maintenance, and even out the financial impact on association members.

Who & When?

We’ve identified a number of capital projects that may require additional professional support to properly plan and estimate replacement costs. Investing funds up front to work with a qualified, structural engineer, mechanical engineer, construction manager, construction estimator, project manager, elevator expert, fire protection system engineer, architect, or contractor can significantly mitigate the possibility of unhappy surprises and create a realistic funding plan. We’ve identified a few areas where legal and audit advice is advisable. Making this a point of discussion with your reserve analyst will help. Some firms that provide reserve studies are multi-disciplinary and may have some of these resources in-house.

The optimal time and depth of study will depend on the projects themselves. Hopefully this series has helped you to take a hard look at the components in your reserve schedule, do a risk analysis and take the holistic approach described in last week’s blog. Once you’ve identified elements that may benefit from further analysis, check the timing. Early on, perhaps you can get some inexpensive thumbnail estimates (hint – plan for the worst, guess high). If you are getting to within about five years of a large project, it might be time to make a more significant investment and hire specialists to take a deeper look. The more complicated the project, the more important this is.

Bottom Line

A truly comprehensive reserve plan can make all the difference in the financial health of a community association and the quality of life of its members. The reserve study is a tool. Your reserve analysts are your partners. See the bigger picture. The better the data, the better the study. The better the study, the better the plan. The better the plan, the better the execution of the plan. The better the execution of the plan, the better the community.