Most homeowners association board members understand what a reserve study is and the beneficial role it plays in managing the financial future of the community association. Another study that comes up for recently constructed associations—and is equally important—is the transition study.
A reserve study analyzes the capital items that the association is responsible for maintaining, which typically include roofs, siding, and concrete. The reserve study provides information regarding each item, including its life expectancy and the cost to replace it in the future. Specifically, a reserve study looks at if and when an item will deteriorate due to ordinary wear and tear. A transition study, on the other hand, has a narrower purpose.
This type of study identifies and documents potential construction or design deficiencies. The key word with a transition study is “defect.” For example, a transition report would reveal items such as roof leaks, water infiltration, or concrete settlement caused by poor craftsmanship or design. A cost estimate to remedy the defect is normally provided as part of the analysis.
Each study also differs in purpose. The purpose of a reserve study is to assist the association in future budgeting for the cost to repair its capital items. Throughout the life of an association, maintenance and repair are ongoing issues that the board continually needs to address. For example, even if a roof was just replaced, the association should immediately begin to budget for future roofing repairs and costs based on the life expectancy of the new roof.
On the other hand, a transition study ideally occurs once, at the time the property transitions from the developer’s control to the homeowner board. At this juncture, some high-quality developers will even order the transition study so they can turn over the property with a “clean bill of health.”
More frequently, the association’s board orders a transition study when it takes over control from the developer. When transition occurs, a study should be ordered immediately. The study then serves a twofold purpose. First, it can be forwarded to the developer along with a demand to address and repair any deficiencies or construction defects. Since an independent, unbiased evaluator performs the study, it generally has more leverage in pressuring the developer to voluntarily correct the issues.
If the demand and further negotiations prove unsuccessful, the transition study can alternatively be used as evidence in litigation to require the developer to pay for needed repairs.
By requesting a transition study, the board also ensures that it has fulfilled its fiduciary duty. The study serves as an independent, expert analysis that the board can use to make sound business decisions when addressing construction defects. Just like with reserve studies, a transition study removes the guesswork from identifying repairs, determining their causes, and estimating costs.
Although similar in some respects, reserve studies and transition studies serve very different purposes. A reserve study can—and should—be ordered and updated over time to accommodate ordinary wear and tear, whereas a transition study looks back to uncover defects caused by the developer or its contractors.
Learn more about Hardy’s Reserve Study services.