Reserve Studies - The Complete Guide is 436 pages explaining the concepts and process for making a reserve study. For more information and to order, click here.



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The Story Behind the Facilities 7 Software System

In the late 1980’s we were engaged to prepare a reserve study for a large property owners association of several thousand homes, significant amenities, several departments, and a large on-site staff.  By any measure, this would be classified as a “complex” reserve study. When our team went on site to perform their reserve study we encountered a number of issues that caused us to completely re-evaluate the reserve study process.

Based on our standard document request, the Association staff had diligently gathered many of the documents we routinely request to help make the reserve study as accurate as possible.  Included with these documents were (1) the prior reserve study, (2) the “asset list”, and (3) the depreciation schedule.  Problem is, THESE DOCUMENTS WERE SO DIFFERENT FROM EACH OTHER THAT YOU WOULD NEVER HAVE GUESSED THAT THEY COULD BELONG TO THE SAME ASSOCIATION.

HOW did this happen?  WHY did this happen?

The HOW - The how was quickly established.  Each document was prepared by different individuals to meet their own specific needs.

The asset list was prepared by the maintenance department staff based on assets they could “see” and for which they knew they were responsible.  This list had a number of glaring omissions, as anything that was out of sight just didn’t get listed.  Also, the “elephant in the room” (the buildings and other structural items) was so obvious that no one thought to include them on the list.  They only listed what is generally referred to as “personal” property assets as opposed to “real” property assets.

The depreciation schedule was prepared by the accounting staff based on a[n] (incomplete) list they had inherited, plus the additions they made through the years based on expenditures from both the reserve (long-term capital replacement budget) fund and the operating fund.  Because of the insane (stupid is probably too strong a word) depreciation rules established by the American Institute of CPAs for homeowners association assets, again, almost all “real” property assets were excluded from this list, but, paradoxically, PORTIONS of buildings were selected for capitalization and depreciation.

The reserve study list of components was prepared by the outside independent consultant retained by the association to conduct the site visit and reserve study report. Unfortunately, this is the norm for the industry; the outside consultant decides what goes into the reserve study.  On his three day visit to the site he did the expected job of capturing a list of most major items that should have been included on the reserve study.  He did NOT ask about the Association’s reserve policies.  It didn’t matter anyway – they didn’t have any.  He did NOT ask about the Association’s maintenance plan; after all, HE was the expert, so why shouldn’t he tell the Association staff what their maintenance plan should be.  He did NOT include some “hidden” components; those that could not be seen, but which definitely do have a limited life and are the Association’s maintenance responsibility.

The WHY - This is a more complex question.  But, it reveals weaknesses in the data accumulation process.

The maintenance staff prepared an incomplete asset list because (1) they don’t know what other users of this information may need, and (2) they often don’t particularly care what the other users may need.  They are simply too focused on trying to get their own jobs done.  They don’t answer directly to the accounting staff, the general Manager, the Board of Directors, or the outside reserve consultant.  They answer only to the maintenance supervisor, and HE doesn’t know what the other users may need of this information.

The accounting staff prepared an incomplete and inaccurate depreciation schedule because they can only work with the information they given, subject to the rules they are required to follow. (1) They are not necessarily informed when assets are taken out of service, and generally discover it only when a replacement purchase is made.  (2) Depreciation rules require them to ignore certain assets which do not meet the accounting criteria for capitalization and depreciation. (3) They usually don’t have direct access to the maintenance staff regarding operational issues; they only “see” the dollars, and usually after the fact.  While the accounting staff generally has better interdepartmental access than others in the Association, they usually do not have direct lines of communication or reporting authority to operations staff or the Board of Directors.  Accounting is normally viewed strictly as a back office necessary evil, not as a contributor to knowledge management of the Association.  Big mistake.

The outside reserve consultant prepared an incomplete reserve study simply because he’s “out of the loop.”  Too often, he is also viewed as a necessary evil rather than as one who can contribute to the knowledge management of the Association.  He simply was not given enough information to do his job properly.  And, if he had been, the Association did not want to pay for that job.  They only wanted to pay for the minimum reserve study required by state law.  No one viewed the reserve study as possibly being a management tool; it was viewed solely as a means of meeting statutory requirements.  It did not reflect the Association’s actual maintenance plan, and could not effectively be used for forward financial planning.  This DOES NOT mean that the funding plan was necessarily inadequate, just that the detail of timing and amount of expenditures did not bear much relationship to the actual maintenance plan.  Overall, the funding plan was reasonable and adequate for the Association.  The beauty of establishing a 30-year funding plan is that over the long term it can be accurate, even if many underlying details and assumptions are incorrect.

Let’s talk about other players in this process; the general manager, the maintenance supervisor, the Board of Directors, and Association members.

The general manager may question or challenge portions of the study, and may even force revisions.  However, short of preparing the study himself, he must ultimately accept the reserve study report.

Ditto for the maintenance supervisor, although he is the one that probably has the best overall understanding of the Association’s maintenance activities.  But, he’s unaware of how his operational information may affect the accounting department or the reserve study.  He also may not be aware of industry standards for differentiating between operating and reserve activities.

Then, the Board of Directors gets involved after all other players have “blessed” the study.  Most directors will not have the technical expertise to challenge the study, nor should that be required.  They have adequately performed their duties by making sure that the appropriate people have been involved in the process of creating and reviewing the study.  Where the Board HAS fallen short is in ESTABLISHING RESERVE POLICIES to ensure that they, and not the outside reserve consultant, are in control of the reserve study process.  While the Board may delegate the duties related to preparation of the reserve study, they cannot delegate the responsibility.  The Board is ultimately responsible for the reserve study.

Most members will never see the reserve study.  Most Associations will distribute a summary of the study as part of the budget disclosure process or make it available in the Association office.  Most members will never want to see the reserve study.  They simply see it as being part of their monthly assessment.  Again, few would have the technical expertise to decipher the report, nor are they enough involved in Association maintenance activities to have knowledge about what should be included in the reserve study.

So, where did this leave us with preparing the current reserve study?  It left us realizing that, if reserve studies are ever to live up to their potential, the process needs to be completely turned on its ear as compared to current industry practices.

This is what ultimately started the development of the Facilities 7 integrated facilities management software system.  However, while we knew what we wanted in a system, we had to wait for technology to catch up with us so the system could be developed.