Reserve Fund Study Consumer Guidelines

PDF | Print | E-mail

Shey Ergil, MBA, AACI, P.App, CRP

First, it should be pointed out what a reserve fund is and is not. A reserve fund is a long-term budget for the predictable replacement of large capital items and large repairs. A reserve fund is NOT a structural audit.

Whether prepared by engineers or real estate consultants, all reserve funds typically contain the phrase, “This report is not a structural audit”. So although engineers may be capable of conducting structural audits, they do not do so in the preparation of reserve fund studies.

There are four general steps in preparing a reserve fund study:

1. Inspect the property and quantify the items (Visual inspection)

2. Prepare today’s replacement cost

3. Forecast future costs at time of replacement (Inflation)

4. Determine contribution schedule (Interest)

1. This step involves a visual inspection only. Whether engineers or consultants, neither type of professional conducts any sort of rigourous or invasive testing. Thus, the objective is simply to visually note the overall age and condition of components, not to discover hidden problems with foundations and the like. The latter would be part of a structural audit, and is a separate product from reserve fund studies and serves a different purpose.

2. Preparation of replacement costs is conducted the same way by all professionals preparing a reserve fund study. They consult cost manuals, tradesmen, and refer to known costs from other projects.

3. Forecasting future costs involves forecasting a long-term inflation rate for the economy as a whole, and construction prices as a subset. Some real estate consultants have an economics background or education, while most engineers have no specific training in this area.

4. Determination of the contribution schedule is a reflection of financial planning. It is based on the results of the first three steps, a forecast of interest earned on reserve funds, and a benchmark. There is no ‘industry standard’ for this benchmark, and legislation only requires that there is one. Thus, the determination of the benchmark can, and does, vary with the practitioner.

Who does reserve fund studies?

Reserve fund study practitioners consist mainly of two groups: Engineers, governed by APEGGA in Alberta, and Certified Reserve Planners, governed by the Real Estate Institute of Planners. The second group tend to also be real estate appraisers, governed by Appraisal Institute of Canada. Engineers are not specifically trained to prepare reserve fund studies, and reserve fund studies are not truly an application of engineering. The Certified Reserve Planner designation is focused purely on the preparation of reserve fund studies.

The ‘engineered’ reserve fund study only means that it is signed by an engineer. The actual preparation of the report may be by someone who is not an engineer. As mentioned above, the basic methodology to prepare reserve fund studies is the same regardless of the practitioner, and so there is no actual ‘engineering’ involved in reserve fund studies. Within their profession, there is no particular standard for the preparation of reserve fund studies.

The ‘functional’ reserve fund study exists as a standard model put forth by the Real Estate Institute of Canada. While it may be an effective model, it could be adapted to suit the needs of the consultants and clients who use it.

So what does this all mean for the consumer?

The reserve fund study is a budgeting tool, not a structural audit. The ‘engineered’ study does not contain any engineering in the traditional sense of the word, and only implies that an engineer has endorsed the report. The ‘functional’ study exists as a model used in some form by Certified Reserve Planners who are trained specifically for reserve fund study preparation. Thus, on paper, it is difficult to see a strong difference between practitioner groups.

The difference arises, then, with the particular firm that prepares the report. This is regardless of any apparent credentials.

The consumer should:

• Ask for samples of work. If these samples seem unclear or you don’t agree with the methodology, then you probably won’t be happy with the report on your property.

• Ask for references. Your property manager or another property manager will have insight as to the relative merits of various firms.

• Ask for credentials. This includes experience as well as education.

• Finally, ask what the service will entail. You ideally want a study that works for your property and fits within the needs of the people who live there. Therefore, you want a consultant who is flexible and willing to work WITH you. Will the consult involve you in the process, if you want? Will they attend Board meetings to explain results? Are they willing to make changes to better suit your needs?

In summary, the condominium Board needs to consider the merits of each company based on their performance, not necessarily on their particular credentials. Some practitioners are better than others, and this is not predicted by one professional background over another.