Continue to Site

Eng-Tips is the largest engineering community on the Internet

Intelligent Work Forums for Engineering Professionals

  • Congratulations waross on being selected by the Eng-Tips community for having the most helpful posts in the forums last week. Way to Go!

Capital Reserve Study 1

Status
Not open for further replies.

beej67

Civil/Environmental
May 13, 2009
1,976
US
A friend and I are planning on moving into doing some Capital Reserve Studies for land management companies, particularly in the multifamily sector. For those unfamiliar, this is basically taking an inventory of all the stuff in a condo complex, figuring out how often the stuff needs to be repaired, estimating those costs, charting it out, and projecting how much their condo fees need to be to provide a baseline for repairs. There's more to it than that, but not much more.

My qualifications - PE in several states, experienced in flood hydraulics, detention ponds, civil design, paving. Site stuff mostly.

His qualifications - BOMA certified Facility Manager currently working for an international land management company with a half million square foot portfolio. He does this sort of stuff all the time, but currently for banks, not multifamily, and not under his own umbrella.

So the questions that arise are..

Are there specific certifications one must carry to do a report like this?

What sort of liability is carried by a report like this? Would professional liability insurance cover it?

Anything else to think about?

Hydrology, Drainage Analysis, Flood Studies, and Complex Stormwater Litigation for Atlanta and the South East -
 
Replies continue below

Recommended for you

beej67...no particular qualifications for this. I've done lots of capital reserve assessments for real estate transactions. Those are qualified depending on the criteria used for the condition assessment. If it's only a capital reserve assessment for a real estate transaction, have at it.

If you are doing a reserve analysis for a condo association, that's a different animal. Now you're getting into statutory reserve requirements which will have a greater liability. Be careful.

Many professional liability policies preclude work such as this for condos.
 
statutory reserve requirements
Elaborate? Where do I fish these up for Georgia?

I'll check with my PL guy to see whether I'm covered.

Hydrology, Drainage Analysis, Flood Studies, and Complex Stormwater Litigation for Atlanta and the South East -
 
beej67...search for the actual text of the Georgia Condominium Act. It covers reserves and how you have to assess conditions to apply reserves.
 
you certainly do not need to be an engineer to do this. But a background in construction and procurement costs would be useful. Unfortunately, not all states have statuatory requirements for doing these. I have been on an HOA board for about 7 years, previously the secretary and president and currently the treasurer. The reserve study was done previously by a consultant about 8 years ago. It has been maintained/updated by the board since then. The board has sole responsibility / liability for assessments and funding of the reserve account, not the consultant. Especially since the consultant is not able to force the board to follow the recommendations in the study.
 
I've done many, many reserve studies, for condominiums, real estate advisors, banks, and HUD. There are no particular professional requirements, but it is good to have a well-rounded background with a little of everything including being very familiar with model and local codes. It is also important to have a good sense of finances. There are some guidelines produced by FHA for properties looking to qualify for loans if you want to start on some basics.

Each condominium has their own CC&R's and you will have to interpret that in order to determine which building elements to include. The biggest mistake I've seen are reserve studies that do not differentiate between routine maintenance and a capital improvements. Even if there is a disagreement, at least have a distinction that forms the basis for your assumptions. This can make a difference in how the work is funded, whether through routine, monthly fees or special assessments. Not your job to figure that out, but it is important to the board.

The risk of doing reserve studies, especially for condos, is failing to mention something important that may have a financial impact at some point in the future, even if it is not directly related to the reserve study. For example:

You have a condo that has a common-element roof-top deck that needs regular maintenance. But during your site visit you note that the owner in the unit directly below the deck has installed a fireplace flue that extends about a foot above the deck. We'll assume that the local code requires that the flue be extended at least 10-feet above the deck. Also, the access stair to the rooftop deck is too narrow and the risers exceed the maximum set by current codes, but met the standard at the time it was built.

It's likely that the flue is a limited element and the unit owners that installed it are responsible for extending it to proper height. It's not a cost that should be reflected in the reserve study, but you must mention that it needs to be done. The stairs are likely common element, but reconfiguring the existing stairs to meet current code is a capital improvement that may or may not be required depending on permitting requirements. A prudent report writer would include this somewhere to alert the HOA that the stairs may have to be altered for them to continue to use the deck. Whether they follow through or not is not your concern. Chances are they will make the unit owners with the flue extend it to proper height, repaint the deck and purchase a couple of new planters and skip the stair because no one likes special assessments. But the City inspector who comes out to approve the flue notices the stair and writes them up. If you do not have it in your report, someone might look to your E&O insurance and your deductible to fund the new stair.

The most important skill is being very good at using Excel. Take a class at your local community college. That's what I did and have never regretted it, although now I just use it to figure out where my projects went all pear-shaped.

"Gorgeous hair is the best revenge." Ivana Trump
 
Cass has nicely pointed out some of the pitfalls of reserve studies for condos.

I will reiterate this point.....a Capital Reserve Analysis for a real estate transaction is significantly different than a reserve analysis for a condominium association. The first one is done on the fly during a real estate transaction. The second is a statutory requirement that places a higher duty and liability on the reserve analyst, without regard to qualifications.

Also keep in mind that a licensed engineer or architect doing a reserve analysis will almost always be held to a higher standard than an accountant who does one...simply because of the greater knowledge of the physical condition assessment required for a proper reserve study.
 
Cass,

Thanks.

Ron,

I've fished through the Georgia Condominium Act, and it it doesn't mention capital reserve studies, at least as far as I can find. Other web sources seem to indicate that it's not a requirement in Georgia. Are you sure they're required, and if they're not required, would the higher duty and liability apply?

Both,

I've got a sense of what the market will bear for these sorts of things for apartments. Condos sound more complicated, more thorough, and more touchy in terms of liability. What's going rate for one on condos? Double?

Final question, this is where it gets fun.

The first really big development boom in Atlanta was 70s/early 80s, and the common practice for storm drainage back then was to do everything CMP. I've done quite a few drainage investigations for multifamily owners in Atlanta where the pipe invert was rusted out. I'm looking at such a project right now, built in the late 70s, pipe at the end of its operational service life. I have a copy of their previous capital reserve study, done in 2004, which is very comprehensive, but does not mention any subsurface storm drain utilities in it. The future need to line or replace these storm drain pipes was completely omitted, and that stuff ain't cheap.

By your line of thinking Ron, and in your experience Cass, is the previous firm who did the capital reserve study liable for not mentioning these storm drains? And if so, what's the liability exactly? What sort of damage can they have been shown to cause? Even if the previous firm didn't mention the need for this particular future repair, they didn't cause the need for the repair, did they? Have you seen legal action like this, and in your experience, what sort of damages were sought?



Hydrology, Drainage Analysis, Flood Studies, and Complex Stormwater Litigation for Atlanta and the South East -
 
beej67..directly to your last question...
It would be difficult to consider the firm to be negligent when a standard of care has not really been established in Georgia for a reserve study, since reserves are not specifically required by law.

Look out though...it is probably coming in the near future. Attached is a pretty good article on the subject.

Florida has specific requirements for reserve funding, which are based on estimated remaining useful life of 8 or 9 specific common elements....roof, pavements, structure etc.

Georgia does not yet have this; however, the do have a construction defect and repair act that sort of pulls a lot of that in, so between the two of them, (in my opinion) there is a higher liability potential for us.

Further to your question about past litigation...yes. I've been involved in several where the engineer or architect who did the "turnover" report, "conversion" report, or reserve study got tagged. Most of these were due to negligence in not properly assessing structural conditions or not noting probable construction defects that then created huge expenses for the owners that were not covered by reserves.
 
 http://files.engineering.com/getfile.aspx?folder=5bcb322e-42c1-445c-bcfb-5fcbf2961da6&file=GeorgiaCondoAct-Article.pdf
Your fees are dependent on the level of service provided. For real estate transactions, the people using your report are generally just trying to fill in all the little boxes on the loan application that their lender requires. As such, the report is considered to be a commodity and they look to spend as little as possible. But on the bright side, they are professionals with a certain understanding of the role of everyone involved.

HOA's are populated with people from all walks of life and many of them without much understanding of what they are doing when it comes to finances. Even if the person you are dealing with is knowledgable, consultants sometimes get hired because the condo's point person can no longer deal with the board members who are idiots. There is a lot more hand-holding involved. Your only option is to be very specific about what tasks are included with your report.

Every report I've ever seen or produced had caveats that described the methodology of investigation, generally limited to what you could readily observe without removing building components, operating equipment or special testing. Subterranean piping would fall into the category of hidden conditions unless the consultant was provided with test reports or other materials indicating that the HOA knew of the issues.

One thing for certain, there will be at least one individual who objected to your involvement before you were hired. It's your job to protect yourself and decide the minimum level of service you are willing to provide, after which the risks become too great. I liked to start my reserve studies off with a questionnaire and an open meeting where all owners were invited to speak about their knowledge of the building condition. I also usually made the association sign a document that listed the items to be included and more importantly, the ones that were to be excluded. BUT, in my previous example, even if the HOA wanted the cost of altering the stair excluded, you must still mention this somewhere. As a professional, you are expected to know things that homeowners are not.

There are some very sophisticated HOA's that may hire several consultants of various disciplines and do their own compilation of the reports in one master reserve study. Just because something isn't located in one report does not mean the information isn't somewhere else. The board may also do some of it's own investigating because they happen to have access to professionals with specific knowledge.

If you are not already familiar with ASTM E2018, guideline for property condition assessments, get a copy and read it. It is not specific to capital reserve studies, but the work is related.

"Gorgeous hair is the best revenge." Ivana Trump
 
Did you make them sign the exclusion document as part of your contract?

Hydrology, Drainage Analysis, Flood Studies, and Complex Stormwater Litigation for Atlanta and the South East -
 
Unfortunately, I'm not in a position to turn work away, and I listed it on my insurance application so they should know I'm doing a little of it.

Hydrology, Drainage Analysis, Flood Studies, and Complex Stormwater Litigation for Atlanta and the South East -
 
Actually, this is a question as much as a response.

Have any of you run into insurance carriers that REALLY don't want you to do condo work??

My last carrier made it VERY clear that I refrain from such endeavors?? So I did.

When I asked why - they just said they got way too many claims??
 
My insurance shopping experience is limited. I have an insurance broker I was recommended to contact, I contacted him, he asked me to fill out some forms that included projected billings broken down by market sector, I projected them, and I signed up for coverage. Multifamily residential was on the list, and I did say up-front I was doing some work for them, on the order of 8% ish I think. My total projected billings are still relatively low at this stage in my business's evolution, though, so I'm effectively just paying the minimum threshold for insurance. I got the impression they'd take a harder look at my market sector breakdown once I started billing enough to increase my exposure.

Then again, this saga is still ongoing on my end, because my insurance folks have still, after several weeks, not gotten back to me about whether doing capital reserve studies for condos is covered by my prof liability policy. I'm afraid I may have sounded some alarm bells. Regardless, I haven't actually done any of these things yet, so it's not like they can dump me for asking politely if they're allowed.

/shrug

Hydrology, Drainage Analysis, Flood Studies, and Complex Stormwater Litigation for Atlanta and the South East -
 
Status
Not open for further replies.

Part and Inventory Search

Sponsor

Top