Most 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 as 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 is looking to see if and when the item will deteriorate due to ordinary wear and tear. A transition study, on the other hand, has a narrower purpose.
A transition study identifies and documents potential construction or design deficiencies. The key word with a transition study is “defect.” For example, a transition study would reveal such items 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 transition study.
Each study is also different 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 is an ongoing issue 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 just occurs once at the time the property transitions over from the developer’s control to the homeowner board. At this juncture, some high quality developers will even order the transition study so that 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 of the association from the developer. When transition occurs, a transition study should immediately be ordered. 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 transition study, it generally has more leverage in pressuring the developer to voluntarily comply with correcting the defects. If the demand and further negotiations prove unsuccessful, the transition study can alternatively be used as evidence in litigation to force the developer to pay for needed repairs.
By requesting a transition study, the board also ensures that it has fulfilled its fiduciary duty. The transition study serves as an independent, expert analysis that the board can use to make sound business decisions in terms of properly addressing construction defects. Just like with reserve studies, a transition study takes the guess work out of identifying repairs, the cause for repairs, and the costs.
Although similar in some respects, the reserve study and transition study serve very different purposes. The reserve study can and should be ordered and then updated in the future to accommodate the ordinary wear and tear that the common elements will suffer, whereas the transition study looks back in time to discover defects caused by the developer or its contractors.