Stone Mountain Corporation
Re$erve Studies

The Reserve Study Process – From Start to Finish

In order for your association to have a reserve study completed, here are the steps that need to be done. Also included are some ideas to make the process most beneficial to you and your association:

1.Get a cost proposal letter from us. We will ask you questions about your association, including the number of units and the types of amenities (pool, spa, tennis, etc.). Based on that information, we will send you a cost proposal with background information and some informative reserve study articles we’ve had published in national condominium magazines.

2.Get approval for the reserve study from your Board.

3.Fill out and sign the Reserve Study Agreement. Note that on the front page, there is some financial information that we will need such as your projected fiscal year-end reserve balance, interest rate on reserve accounts, and how much does your association currently contribute to reserves annually. If you’re not sure how to project your fiscal year-end reserve balance, contact us and we may be able to provide some guidance. The reason we need to know your fiscal year-end reserve balance is because reserve studies must be done on a fiscal-year boundary per California Civil Code 1365.

4.Contact us to set up an appointment for an on-site inspection of your association. During this visit, we will develop an inventory of your associations capital assets such as roofing, paving, pools, etc. We will also estimate when you will be needing to replace each item in the future. We like to have as much input from you as possible, so you may want to invite other board members or people who have a good knowledge of the long-term maintenance history. We’ve often seen reserve studies prepared with little input from the Board of Directors or the management company and the result is often inaccurate reserve studies. The timing of replacement of some items often depends on the aesthetic interests of your association, not us. We don’t impose our notion of aesthetics on your association. Rather, we solicit your opinions on scheduling issues such as when your association plans to paint their wood trim, for example. Different associations have different standards.

If no one is available to meet on-site, we perform the physical inspection and measurements and then if we have questions about issues, we discuss them over the phone with you.

5.Meet with us at your association so we can evaluate your long-term capital expense requirements. During the first part of the meeting, we'll sit down with you and discuss recent reserve expense projects that have been completed and how much they cost. We'll also review any prior reserve studies you've had done and take note of changes or deficiencies that you've been concerned about.

It is helpful if you can come prepared with any invoices or cost history information from your files. Then we ask you about your forthcoming reserve expenditure plans so we can accurately incorporate them into your reserve study. Finally, we take a tour of your association, in which you point out key issues of importance from a reserve expense standpoint. For example, you might want to show which units have dry-rot problems that have to be addressed, or you might point out the delamination in the pool plaster that will require a pool resurfacing next year.

Oddly enough, the reverse is often true in that we often call attention to issues that Board members are not aware of that can become problematic in the future. Most Board members who have participated in a reserve study site visit find the experience quite informative.

After all, we see hundreds of associations and we have had a wonderful opportunity to learn from their mistakes and triumphs in resolving various construction and maintenance problems. This sharing of information about how other associations are solving problems is an unspoken side-benefit of the reserve study process for which most clients express deep gratitude.

6.At the site visit, ask for a brief overview of a sample reserve study. Since the reserve specialist won’t be present when you receive the reserve study in the mail, a few minutes spent explaining the key parts of a reserve study will save you a lot of time when you do receive your copy. Education is an essential part of this process.

7.Provide follow-up information as requested. After the site visit, we usually have some follow-up questions that we need to clarify in order to complete the cost calculations and long-term cash flow projections that are an integral part of your reserve study.

8.Reserve study report preparation. Once all the physical analysis data has been gathered and the financial analysis has been done, we produce a bound 35-100 page report, depending on the size of your association. The goal of a reserve study is to provide you with:

 a) A measure of your reserve fund status (how well-funded is your association relative to depreciation of all assets?), and

 b) A reserve funding plan such that your association will be able to fund anticipated reserve expenses as projected.

9.You receive your reserve study. The reserve study will be sent to you within 5 days to 8 weeks after we have received the contract from you and all the required information. The turnaround time depends on the turnaround option you choose with a rush priority costing more than an economy turnaround.

At this point, you might want to read the following article by Chris Andrews of Stone Mountain Corporation: We've Received our Reserve Study - Now What?" -- Common Ground Magazine -- Jan/Feb 1997

10.Review your reserve study. We offer a 30-day draft review period during which time, you may review the reserve study and look for omissions or fine-tune some of the reserve expense scheduling. Because we try to be as detailed as possible, in about 90% of the cases, the first draft suffices as the final draft.

Nevertheless, you should insist that your reserve study provider offers a draft review iteration as a part of their fee. Several of our clients have told stories of reserve study providers who were completely unreceptive to making changes to the first draft. “This is it,” they were told!

This is unfortunate because an initial reserve study draft can provide valuable assistance to the decision-making process. For example, some associations might be facing a special assessment for some imminent large expense and they don’t know how much the special assessment should be. At the same time, they understand the need to leave some funds in reserves after the large expense project has been completed, but just how much? A good reserve study will help them calculate what the baseline reserve expenses will be over time and how to fund them on a yearly basis. And, with those constraints in mind, the proper amount of special assessment can be determined.

In other cases, some associations have begun the reserve study process thinking they will need a special assessment for some projects, but when all the expenses are projected and offset by their healthy reserve income, they’re quite pleased to find they don’t need to special assess their membership. Instead, they can fund everything with a modest increase in monthly fees.

And some associations utilize the draft review process to fine-tune how much they want to increase member fees for the next year, subject to whatever “political climate” exists at their association. One might initially think that this is corrupting the process of performing an objective reserve analysis to have a board member ask a reserve study provider, “My association members are going to have a mutiny if we raise fees more than $20 per month next year! Which reserve expenses can we push out one more year into the future to reduce the reserve funding requirements?”

Yet in many cases, this is not an issue of corrupting the process. Most reserve study providers acknowledge that there are “mission-critical” items such as replacing a roof that absolutely must be scheduled in the reserve study when needed, versus some items that can be scheduled arbitrarily such as doing a landscape renovation project, or postponing painting for a year if the paint is in reasonable condition. It is for the latter cases that a good reserve study provider will be flexible enough to incorporate the plans of the Board into the reserve study.

11.Present the reserve study results (fund status and funding recommendation) to your board. Once you are satisfied with the reserve study, you or someone who is most familiar with it needs to present the results to the board and then the board votes to approve the reserve study and documents the review and approval process in the minutes. This is part of complying with the requirements of California Civil Code 1365.5 which requires a reserve study every 3 years and that the board shall review the reserve study.

Some boards ask their reserve specialist to attend a board meeting to present the reserve study results and answer questions. This is usually quite beneficial, especially in cases where the board or the membership is intensely divided over the issue of fee increases. Having an objective third party present to explain the rationale for funding reserves at the recommended levels and to answer questions in a clear and concise manner helps to cut through those divisions. People are often more apt to agree to a reserve funding plan if it is presented by an unbiased person rather than a board member for whom they may happen to harbor animosity. Note that board meeting attendance by a reserve specialist is not typically part of most reserve study contracts, so expect to pay for the reserve specialist’s time to attend.

12.Disclose the findings of your reserve study to your membership in your annual budget mailing. This disclosure must be sent between 45-60 days prior to your fiscal year-end. Note: Assembly Bill 2718 changed this deadline to 30-90 days prior to your fiscal year-end after July 1, 2005. In the State of California, Civil Code 1365.5 requires that you disclose the following:

● How much money is needed to fund projected reserve expenses

● Percent-Funded Estimate

● Reserve Component list, useful life, remaining life, current cost to replace

● Cost of items at end of useful life (future cost).

● Indicate whether or not special assess needed

● Disclose methodology used to determine calculations

You may summarize the above in your annual budget letter and indicate that a copy of the reserve study is available for all interested members to review.

Finally, keep in mind that California Civil Code 1365.5 requires annual reviews of the reserve study by the board in addition to having a reserve study with a site inspection done every 3 years. It is common for mid-to-large size associations (over about 40-60 units) to do annual reserve study updates (without a site visit), especially if assumptions and circumstances have changed since the last reserve study.

As you can see, the reserve study process is not particularly complicated, and the rewards of sound financial planning are well worth the effort.

Now you're ready to take the leap!

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