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Monday, 29 November 1999 16:00

Board Held Hostage by Reserve Study

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While a reserve study cannot technically hold a board hostage, in this particular case, a board’s lack of initiative in dealing with a situation, coupled with the actions of an unreasonable reserve professional, left the board feeling as if they were being held hostage to their reserve study.

Let’s go back to the beginning to see how this situation developed. The Association is approximately 30 years old, and has responsibility for maintaining some 15 miles of roads serving its more than 2,000 members. While the roads are not the only components within the reserve study, they are the most significant in terms of dollars and maintenance obligation. The roads are well-constructed, and have received appropriate maintenance over the years that consisted of annual crack filling, slurry seal on approximately a five-year cycle, spot repairs as needed, and overlay on approximately a 20-year cycle.

Many years ago the Association engaged a well-known contractor to perform the annual maintenance work, and has continued to use this company consistently through the years. Although this contractor did not construct these roads, the company does construct roads as part of its service activities, so it is very familiar with the proper maintenance activities that should be performed.

In addition, several years ago the Association engaged an engineering company to perform a pavement study of its roads. This study was conducted over several weeks and included core samples of each road. The engineering company prepared a comprehensive report of its findings and recommendations, and the report was used as the basis for developing the long-term maintenance plan for the roads described above.

The Association has also performed reserve studies for more than 15 years, updating them consistently. The Association initially conducted this activity using in-house staff, but approximately 10 years ago decided to begin outsourcing the task to an independent reserve professional.

The selected reserve study company compiled a comprehensive inventory of Association common areas requiring maintenance and inclusion in the reserve study. It also evaluated the maintenance activities that were being performed on the roads. At that early point the engineering study had not yet been performed, but the road maintenance company had already been in place for many years, and the maintenance plan was well-established. The engagement of the engineering company to perform a pavement study did not result in a significant change in maintenance activities, except for timing of when certain maintenance activities should be scheduled. The maintenance plan being conducted by the Association was incorporated into the reserve study, matching dollars with planned maintenance activities.

Last year the Association decided to change reserve study companies, primarily to get a fresh set of eyes on their maintenance plan. The company that was selected used a professional engineer to perform the site visits and compile the list of common area components. It was with this individual that the problems began. He recommended a complete removal and replacement of all road surfaces at a point in the not-too-distant future, simply based upon the fact that the roads were already 30 years old and therefore must be in need of a complete replacement. It was later learned that this engineer had recently encountered a similar situation at another Association where a complete removal and replacement of road surfaces was necessary. What the reserve professional apparently failed to consider was the difference in maintenance activities and condition of the roads. We have no knowledge of the quality of construction of the roads or the maintenance activities of the other association which influenced the reserve professional. However, the fact is that the planned maintenance activities for this Association should be based upon its own engineering study and long-range maintenance plan, not on what happened somewhere else.

The problem is that the professional engineer used by the reserve study company was steadfast in his belief that his position was correct, and that the road would require a complete removal and replacement. When challenged by the Association that this level of activity was not considered necessary for the roads of this Association (a position that was backed up by the engineering study), the reserve professional, apparently not used to being questioned, simply dug in his heels and refused to budge on his position. He stated that he was the professional engineer, he was the expert that had performed hundreds of reserve studies, and that the Association must accept his report.

The Board of Directors had never faced such a situation and were unsure as to how to proceed. Some board members felt that a second opinion should be requested. Others believed that because they had hired a qualified reserve professional with a good reputation, his advice must be followed, and that the recommended funding plan, which included a very significant (“break the bank big”) increase in reserve contributions must be followed.

It was at this point that the manager of the Association reached out to me for help. He knew that as an insider at the Association, one faction of the board would not be inclined to listen to his opinion or advice on the matter. He felt that an independent third party like myself would be accorded a higher degree of confidence than somebody on the inside like himself, who could be perceived by some as having a bias in the matter.

As the situation was fully explained to me, I was presented with the reserve study report, the pavement study, and a summarized history of road maintenance activities. I am no expert in road maintenance activities, but like many managers, I have dealt with asphalt repair companies over the years and gained knowledge by asking lots of questions about the work being performed. Once I had an opportunity to review the documents and drive the roads of the Association, it was apparent even to this lay person that the roads appeared to be in good condition and that the maintenance activities were appropriate, given that the Association had already engaged experts for this purpose. The written opinions and recommendations as to road maintenance activities were at odds with the findings of the reserve study.

The board was left in a completely untenable position, as they felt they must give consideration to the expert and his reserve study report. On the other hand, they realized that the Association could neither afford his recommendations, nor would the board ever be able to “sell it” to the membership. As a result, the board did not know what actions to take.

Unsure of what my next step should be in communicating my limited observations to the manager and the Board of Directors, I wanted to see if there was any further information of which I could avail myself. So I called upon my longtime friend, Gary Porter, RS, PRA, CPA, at Facilities Advisors, Inc., a company that provides reserve study services to associations nationwide. My question to him was, “How could this happen?” He explained that the root problem is that 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 situations like this should be reported. (See his article on “Who Owns the Reserve Study Report?”)

In this current situation, it is apparent that the reserve professional has taken the position that he “owns” the entire reserve study; that it is a report on his independent study and his recommendation of the long-term maintenance plan. However, the wording of the “report” gives no support to this position.

At this point, the Board of Directors has the following options:

  1. Accept the report as is and increase the reserve assessments significantly to provide for the increased projected expenditures for roads.
  2. Reject the report completely and engage another reserve professional to get a second opinion.
  3. Accept the report with reservations, and state that the board specifically rejects the funding recommendations for road repairs and instead adopts a different funding model. It would be wise to seek legal advice in this case, but it would seem to be a reasonable position to take given that the Association already has an engineering pavement study to support its position.

This is a recent incident, so no action has been taken at this point. It will be interesting to see what course of action is taken by the Association.

The facts are clear: 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.

Taking all these facts into consideration, it would appear that the current reserve professional’s opinion is quite unreasonable in this instance.

 

Additional Info

  • Author: Chuck Miller
Read 8799 times Last modified on Thursday, 05 June 2014 19:17
Chuck Miller

Chuck Miller has spent decades working in the Community Association industry in various capacities.  Starting as a homeowner, then serving on his association's board of directors, he started a maintenance business when he realized there was a need for someone with a good understanding of the industry.  Mr. Miller later served as an onsite manager and consultant to several associations.

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