Who Owns the Reserve Study Report?

By | May 18, 2023

There are differences of opinion within the reserve study industry as to who “owns” the reserve study report, what degree of responsibility the reserve professional has, and how certain difficult situations in which boards can almost be held hostage by reserve studies should be reported.

One thing is clear – national reserve study standards do not provide adequate guidance in this area.

Many reserve preparers take the position that they have been engaged to perform an independent study resulting in a report of their findings, and that the reserve professional “owns” the entire report. These individuals also often take the position that their report is the basis for the Association’s long-term maintenance plan.

Unfortunately, national standards do not address this issue. For instance, there is no requirement that the reserve professional make any sort of statement regarding the work performed other than the vague reference to a site visit, nor any statement of opinion regarding the accuracy of the data presented or the degree of responsibility for the report. National standards only require comments on:

Completeness: Material issues which, if not disclosed, would cause a distortion of the association’s situation

Reliance on client data: Information provided by the official representative of the Association regarding financial, physical, quantity, or historical issues will be deemed reliable by the consultant

These are required disclosures that fall far short of expressing a clear, positive opinion regarding the accuracy of the report or the actual work performed.

Others believe that the report is “owned” by the Association, and that the role of the reserve professional is to assist in compiling the data and preparing the report. These individuals generally take the position that the report should be a financial reflection of the Association’s long-term maintenance plan; it does not establish the long-term maintenance plan.

Again, national standards do not provide guidance on how the reserve professional should report on his involvement with the process, nor on his opinion of the conclusions reached.

If a reserve professional chose to add “his” report to the “Association’s Reserve Study Report, what might that report by the reserve professional look like? Within the confines of current national standards, it might look something like this:

We have prepared the accompanying Reserve Funding Forecast of AssocName as of and for the thirty-year period beginning StartDate as a Level I Reserve Study. This forecast is the responsibility of Association Management.

We conducted our engagement in accordance with National Reserve Study Standards of the Community Associations Institute and the Association of Professional Reserve Analysts. Those standards require that we perform a site visit to visually observe and assess the condition of the significant common area components of the Association. A Level I Reserve Study also includes assessing the significant estimates used by management, as well as evaluating the overall forecast report presentation.

This report presents, in the form of a financial forecast, information that is the representation of management of the Association. We do not express an opinion or any other form of assurance on the accompanying report or assumptions. Furthermore, there will usually be differences between the forecast and actual results because events and circumstances frequently do not occur as expected, and those differences may be material. We have no responsibility to update this report for events and circumstances occurring after the date of this report.

While satisfactory, the above sample report wording still falls short of actually describing the work performed or of clearly stating the conclusions reached and the degree of responsibility assumed by the reserve professional. But to get to that point, national standards probably need to be modified.

The subject of Chuck Miller’s article, “Board Held Hostage by Reserve Study”, is a dilemma presented to an Association board when a reserve professional takes a position related to appropriate maintenance activities of roads that is at odds with other professionals’ recommendations.

As quoted from Chuck’s article, in this instance,the facts are that “an engineering firm specializing in geotechnical studies and pavement studies has rendered a comprehensive report on a very thorough study conducted over some period of time, including analysis of core samples, which directly refutes the conclusion of the reserve professional. In addition, a company with decades of road construction and maintenance experience that has, for many years, maintained the subject roads, has offered an opinion that directly refutes the conclusion of the reserve professional. Lastly, the predecessor reserve professional had apparently reached a conclusion concurring with the engineering firm performing the pavement study, and did not consider that complete removal and replacement of all road surfaces was a necessary maintenance activity.”

It appears that the current reserve professional, giving all due respect to his professional engineer credential, is taking an unreasonable position in this instance. It is very difficult for a reserve professional spending only one or two days on what is a relatively superficial evaluation on a reserve study site visit to ever gain the same level of knowledge as the individuals that actually maintain the various components on a daily basis. Often, those individuals are experts in their own right. The evidence appears overwhelming that the reserve professional has taken an unreasonable position based upon insufficient facts.

The reserve professional has demonstrated a level of intransigence that bears a strong resemblance to the current budget negotiations of Congress – “my way or the highway” (pun intended). Refusal to modify a weak position in the face of strong evidence to the contrary should also cause a lack of confidence in other parts of the reserve study. If this is the case, then the Association would be wise to seek another reserve professional to provide this service.

I have long expressed the sentiment that a reserve study is based on a series of assumptions about future events, and except for known maintenance activities occurring in the very near future, it is unlikely that any of the assumptions will prove to be 100% accurate. One purpose of the study is to guide the Association to have approximately the right amount of money at approximately the right time. This can be achieved even though the underlying assumptions are not completely accurate; they just have to be relatively accurate.

The reliance on assumptions makes it easy to challenge the reserve study. However, those reserve professionals holding the RS (Reserve Specialist) or PRA (Professional Reserve Analyst) designations have demonstrated training and experience, and their opinions should be valued. The normal process of preparing a reserve study, and its review by Association management, will typically include a challenge of assumptions used in the study, especially of those assumptions potentially affecting estimated cost, estimated or remaining life, and level of maintenance work to be performed. In most circumstances, it is relatively easy to confirm the assumptions and reach agreement. It is usually only when someone adopts an unreasonable, unsupportable, position that disagreements occur.

Our firm did have such an incident occur several years ago when our Association client (more specifically, the chair of the finance committee responsible for budgeting and overseeing the reserve study) demanded that proposed future roofing expenditures be removed from the study. He stated he had spoken with a roofing consultant and was advised that it was never necessary to spend money on tile roofs, as they lasted a lifetime. We believed that replacement of underlayment was a necessary cost to maintain ability to repel water. He was charged with sole responsibility to deal with us in the preparation of the reserve study, and would absolutely not accept inclusion of the proposed roofing costs, nor would he approve forwarding the report to the full committee or board of directors unless we removed the proposed roofing costs. Our response to resolve this impasse was to remove the proposed roofing costs, include it as the first line item of components excluded from the reserve study, and modify our report to indicate that we believed the funding study proposed by the finance committee to be significantly understated because of the omission. Once this report was exposed to the full finance committee and board of directors, they agreed with our position, and the roofing costs were added back into the study.

If the reserve study report is perceived as the summation of an independent study by the reserve professional, then it is appropriate for him to take reasonably supported positions. The question presented in Chuck Miller’s article is whether or not in this instance, the professional’s opinion is considered to be a reasonable position. Also, support for positions that vary significantly from an existing, well-documented maintenance plan should be explained in the report.

If the reserve study report is perceived as being a report ON the financial forecast and underlying long-term maintenance plan, then the reserve professional’s “report” would be a document (part of the overall reserve study) that describes his analysis OF the financial forecast and underlying long-term maintenance plan. It would be, in this document, clearly identified as being the reserve professional’s “report,” that the reserve professional would express an opinion about the adequacy of the road maintenance plan and the resulting financial forecast.

If the above-described reporting incongruity was resolved, it would be much clearer as to what position the reserve professional was taking, and would give some guidance to the Association in how to resolve the situation in which they find themselves. For instance, it would be clear that either:

* The reserve professional believes the reserve study report to be “his” independent report of the Association’s funding plan for long-term maintenance projects, or

* The reserve professional believes that the reserve study report belongs to the Association, and could issue a one-page report, similar to the language above, but with an added paragraph to highlight his disagreement with certain aspects of the reserve study report.

Either position would be an improvement over the current position, where there is no indication of either the work performed by the reserve professional or the conclusions reached.