Reasonable Reserve Alterations
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CHANGES TO RESERVE STUDY

QUESTION: We just completed our reserve study. There are items on the list with a life that equals or exceeds the estimated life of the buildings. We wanted them removed, but the reserve company refused. Doesn't our board have the authority to remove components from the study?

ANSWER: It depends. Dictating changes to a reserve company is like telling an attorney to change his legal opinion because the board disagrees with it or telling a CPA to change his audit report because directors don't like what he found. A reserve analyst prepares a report based on his own observations and calculations--it's his report not the board's.

Adjustments. Nonetheless, adjustments can be made to a reserve study. Although boards cannot alter a report in a way that that hides, falsifies or distorts the financial health of the association, they can request reasonable adjustments and correct errors. For example, if something is unclear or is missing and needs to be addressed, the board can request a change and the reserve analyst can update his report. 

Adding Items. Even though reserve specialists may initially establish the list of major reserve components, the board can have input on those components. For example, a small association may consider pool heaters a major component and a large master planned community with many pool complexes my consider it an operating expense. In addition, as buildings age boards may want to add components. Sometimes boards want to add components such as landscape enhancements, tree trimming, enclosed decks, pipes which are becoming blocked, elevator technology upgrades, etc. 

Removing or Defunding Items. Finally, boards may choose to shift items added by prior boards and move them to operations. Or they may choose not to fund particular components. "Defunding" a line item can be done if the board meets Davis-Stirling disclosure requirements, i.e., the reserve report must disclose:
Whether the board of directors of the association has determined to defer or not undertake repairs or replacement of any major component with a remaining life of 30 years or less, including a justification for the deferral or decision not to undertake the repairs or replacement. (Civ. Code §5300(b)(4).)
Accordingly, a reserve specialist could list components in his study and then eliminate them from funding calculations with a note that funding was removed at the board's request.

Legitimate Disagreements. Also, a reserve specialist might include an item for 100% replacement of a concrete sidewalk with a 30-year life. The board can legitimately question if this is necessary. It may be that a more realistic approach is to plan for a 20% replacement schedule so repairs can be made as-needed. The reserve analyst should not dismiss the board's concerns but rather discuss them with the board and arrive at a reasonable solution.

CONCLUSION: There is room for dialog between a reserve specialist and boards of directors. As noted above, boards cannot alter the study in a way that that hides, falsifies or distorts the financial health of the association. However, the reserve analyst must be flexible enough to make reasonable adjustments to meet the association's changing needs. If a board is trying to falsify a report, the reserve specialist should withdraw from the account. If the reserve practitioner is inflexible and refuses to accommodate reasonable requests, the board should seek a new reserve company.

ASSISTANCE: Associations needing legal assistance can contact us. To stay current with issues affecting community associations, subscribe to the Davis-Stirling Newsletter.

Adams Stirling PLC