By Dave Kolodzik, PPIA, CRVS / Published October 2021
Trends come and go, but money stays the same! We are in the middle of a great adjustment period in the association financial world. Reserve studies, engineering reports, replacement cost valuations, and budgets are the topic of everyone’s conversation.
Reserve studies are of the utmost importance in today’s roller coaster economy. A properly prepared reserve study will give a clear view of where an association’s finances stand currently and a recommended contribution amount for the report year and beyond. Whether the association follows the threshold or component method of funding, a reserve study will determine their recommended contribution to keep them in a healthy state.
Recent events have prompted the industry to suggest new and innovative procedures to assist the association in planning for and reducing the risk of disasters. One such suggestion is to include a series of entries in reserve studies for insurance deductibles, debris cleanup, professional fees, capital expenditures, and deferred maintenance. These entries are tailored to the association based on their historical values. For example, an association may have had a special assessment for legal fees and building restoration in the previous year. This figure can be included in the study and accumulated over a specified period of time to reduce the need for a future special assessment.
Funding these items will assist the board in their fiduciary duty of maintaining the building and all its components and keep the board on track to have these services performed on a timely basis. Proper planning will assist in reducing the risk of special assessments, maintain property values, and open the doors for new mortgages. As of late, many mortgage writers such as FHA and Fannie Mae have required a current reserve study to complete the mortgage process. In addition, the recommended funding percentage is 70 percent fully funded or higher; with a contribution of at least 10 percent of the total monthly assessments going to reserves. These requirements are fast becoming the norm in the procedures for purchasing in an association.
Generating a budget is never an easy task. Thankfully, the stress can be lessened with a reserve study. Reserve accounts have many variables, including interest and insurance claim payments. These should be taken into consideration as assets in the reserve study report. Many times, these forms of income are overlooked. Your reserve budget, whether funded completely or not, should identify all association responsibility items and all income to the reserve account.
Reserve studies are recommended to be done every three years with updates performed in between. This schedule, much like the replacement cost valuation schedule, will keep the current costs in front of the board on an annual basis. Construction costs are at an all-time high. What costs $100 today may cost $500 next year. When funding your reserves, this can be a major issue if the association does not have current costs reflected in their reserve study.
Engineering studies work hand in hand with reserve studies but are a completely different report. An engineering study addresses the condition of the structure of the buildings. Many times, an engineering study is invasive where a reserve study is not. This information is vital especially for older buildings, buildings that are showing signs of damage, or ones with previous structural damage. A reserve study addresses the components or amenities the association is responsible for. Therefore, things like paint, roofs, pavement, HVAC units, pool equipment, tennis courts, and elevators are not included in an engineering study. Both reports are imperative to manage an association’s finances.
It is also extremely important to make sure that your association has the correct amount of insurance coverage. In 2007 the State of Florida began requiring by statute that all condominium associations have independent replacement cost valuations (insurance appraisals) completed at least every 36 months. The Florida legislature recognized after the horrible hurricane seasons of 2004 and 2005 that many associations did not have enough insurance coverage to properly cover their losses.
In today’s economy it is more about the increase in construction costs—both materials and labor—that is driving reconstruction costs. Over the last five years, construction costs and insurance replacement costs have increased an average of three to five percent per year. However, in just the first six months of 2021, these have increased an average of over eight percent. This, of course, drives up the cost of reconstruction of the association’s assets and therefore what the association is required to be insured for. Even though Florida State law in §718.111(11)a requires associations to have these insurance appraisals done every three years, many associations are opting to have them completed annually.
Dave Kolodzik, PPIA, CRVS
If you have any questions regarding reserve studies or replacement cost valuations, please feel free to call Expert Inspectors at (386) 677-8886 or visit www.flinsurancevaluations.com. We will be happy to assist you and your association(s) any way we can.