Setting a Standard For Reserve Studies

In a previous post from May of 2015, the HOA Detective asserted that the reserve study business was in many ways a wild, wild west of unregulated, self-credentialed practitioners, most of whom have learned their craft through on-the-job training with little else in the way of “formal” education as a reserve analyst:

At the present time there is virtually no college level curricula that is specifically designed for educating reserve study providers, while the industry itself pays only modest lip-service to the subject of training and education of reserve study practitioners.

The tangential skills that lend to becoming a competent reserve analyst include a wide variety of established professional disciplines such as architecture, engineering, accounting, finance and last but not least construction management and cost estimating; a skill which is arguably the single most important aspect of preparing a quality reserve study.

Considering that a quality reserve study prepared by a competent provider can, or at least should cost several thousand dollars, it is somewhat puzzling that the so-called “invisible hand” of the “free marketplace” has yet to demand a higher level of accountability and professional standards from the industry.

In some respects the situation is understandable considering that the market for reserve studies for HOAs is extremely limited. Under the best of circumstances it might be argued that there are 350,000 or so potential customers, if you take into account every single homeowners association in the country.

The reality however, is that the majority of these HOAs have never conducted a reserve study and many will never do so. This unfortunate situation is due to the fact that relatively few states require HOAs to conduct a reserve study and even among those that do, there is little if any enforcement of the statutes.

The tendency for Americans to take a short-sighted view of long-term planning issues, in particular when they have to do with their money, has created an environment that lends itself to thought processes such as:

“Why should I care about the long-term financial stability of my HOA, I’m planning to move in five years?”

Or: “Why should I care about the long-term financial stability of my HOA, I’ll be dead by the time the building needs a new elevator?”

The result of this situation is that many HOAs simply ignore the need for reserve planning, reducing the market for reserve studies to perhaps no more than one third of the total number of HOAs in the country and possibly even less. With numbers like these representing the total market potential for conducting reserve studies for HOAs, there is little incentive for anyone to spend the time, effort and money to develop a serious academic curriculum for training people to become reserve study providers; much less to implement a meaningful system of regulatory oversight.

This situation has resulted in a somewhat casual attitude toward the business of preparing reserve studies because there simply isn’t enough demand for the services of qualified practitioners to justify a more formal academic approach to educating and training reserve study providers or for licensing of practitioners.

There is a potential solution to the problem that doesn’t require an act of congress in order to effect change. With at least two existing models that could be adapted to create an industry standard reserve study process for homeowners associations, it raises the question of why no such effort has been undertaken after almost half a century of exponential growth in the number of HOAs?

The first of these existing models is a highly structured a highly structured form of inquiry known as a Cost Segregation Audit or Cost Segregation Study (CSS). The second is a Comprehensive Needs Assessment (CNA) which is an equally rigorous analysis that is required by federal law for multi-family rental housing developments that receive federal housing subsidies through the Department of Housing and Urban Development (HUD).

The purpose of a CSS is to establish the basis for depreciating certain types of real property; in particular with respect to the ability of the property owner to take accelerated depreciation allowances for various sub-components of the property. Without bring our readers with too many details, the process for performing a CSS is clearly defined and standardized by none other than the Internal Revenue Service in its Cost Segregation Audit Technique Guide.

The purpose of a CNA is to determine what the financial requirements are for addressing the immediate repair and replacement needs of a property that receives federal housing subsidies; and secondarily to establish the long-term funding that will be needed to maintain the property over an extended period of time. Guidelines for preparing a CNA, as well as the inspection process that is integral to the preparation of the report, have been developed by HUD and must be followed by all practitioners who prepare CNAs.

In both cases the procedures established for preparing a CSS and a CNA report are similar enough to conducting a reserve study for a homeowners association that it would seem to make sense that the standards which are required for preparing a CSS and CNA could easily be adapted to the preparation of reserve studies for HOAs.

In the next installment of this series we will examine some of the similarities between a CNA, CSS and the process for conducting a reserve study for a typical HOA.