Underfunded reserves: A community’s nightmare when facing a replacement project - by Andrew Amorosi

August 21, 2018 - Design / Build
Andrew Amorosi,
The Falcon Group

The primary purpose of a Capital Reserve Study is to offer recommendations as to the amount of monies an association or other form of ownership should fund on a yearly basis for the future replacement of commonly owned elements of a single or multifamily development. The analysis and recommendations are important in that they help to avoid possible future special assessments of the individual unit owners. It should take into account the site-specific existing conditions, their useful life, and the realistic replacement costs based upon actual material costs and the site specific individual item’s method of reconstruction.

Unfortunately, associations are finding themselves in an underfunded position at the time of the inception of a replacement project. Whether reconstructing roofs, building façades, roadways, or other aspects of the community, the association relies on the funding that has been recommended and established over the useful life of the item. The association schedules and bids the reconstruction project only to find that the proper funds are not available, the Reserve Funding recommended useful life was not accurate, the item’s replacement cost was wrong and/or the unit quantities were smaller then what was actually constructed. This results in special assessments, community dissention, lost property value, and ill feelings toward the management company, board members and residents.  

The problem always seems to be that the original and/or updated analyses were not realistic, not site specific or not accurate. Errors or deficiencies in either the original Capital Reserve Analysis or the updated analysis can cause this dreaded position.  

Typically, site specific and qualified inspections and recommendations are not performed. The errors or deficiencies occur in the most important aspects of these studies and are as follows:

Useful Life

Every item listed in the Funding Table or Schedule has a useful life associated with it. The useful life indicates the lifespan that the item should attain prior to its replacement, assuming it was installed properly.  Standard useful lives are based upon standards used in the engineering industry. These standards are typically taken exclusively from information listed in life cycle analysis publications and/or manufacturers specifications. 

Actual conditions must be inspected and changes (reductions or increases) must be made to the projected useful lives as conditions change. Structurally, an item may be sound, although the association may consider that the aesthetics of that particular item detract from the community, therefore requiring replacement prior to the item reaching its full useful life as determined by the manufacturer or an industry standard.

Oftentimes, items are not individually (site-specific) evaluated for remaining useful life. The consequence can result in a significantly higher actual replacement cost due to the accelerated (excessive) degradation of that item. The item should have been replaced or reconstructed before this accelerated degradation occurred. Qualified, periodic inspection is paramount in reducing this possibility. It is also important to retain a firm with diversified experts in all major components of the site including: façades roofing, HVAC and civil work. The result will be more realistic evaluation and funding costs.

Quantities

The quantities shown in the Funding Table or analysis are many times taken from site plans, architectural plans, or a previous Funding Table. The quantities used in these studies should be verified by the as-built conditions. This must be done for initial analysis and should always be field checked on subsequent studies.  Failure to provide an association with the correct replacement quantities may result in a significant underfunded condition down the road. 

Replacement Costs

While the unit costs provided in the Funding Table for the replacement of the Capital Reserve items should be based upon a number of sources, including published documentation on replacement costs, they should be based upon experience in site and building construction.  

The individual reconstruction or replacement of each item should be analyzed and the resulting unit costs should be adjusted accordingly. Individual (site-specific) characteristics affecting the unit’s costs are different on every site and the replacement costs should be adjusted accordingly. 

Existing site conditions, the size and scope of the future replacement project, the job access locations; the site restoration costs and presence of existing components are all variables that affect the item’s replacement costs. 

Many times the unit replacement costs shown in these studies barely cover the materials costs for the item. This is an unacceptable philosophy, and is by far the most glaring and unexplainable reason for underfunded reserves.  

Avoiding the Nightmare

Any one of the above-discussed inaccuracies in a Capital Reserve Study can cause incorrect funding for a community. A combination of the errors can be disastrous. Continued periodic reserve updates using actual site conditions and realistic replacement dates and costs is a much more effective way to ensure that an association’s common elements are being properly funded. The qualified inspection of the items by a licensed Professional Engineer (PE) and the preparation of the analysis by a Reserve Specialist (RS) ensures that an accurate evaluation is made.  The periodic update allows for adjustments to be made for useful life, unit quantity, unit cost, or additional items to be funded as required to avoid the “nightmare” of the special assessment. 

Andrew Amorosi, P.E., R.S., is principal for The Falcon Group, Bridgewater, N.J.

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