Without a doubt installation of fire sprinklers and earthquake retrofits make buildings safer and could save lives when and if they should ever be needed. Some municipalities have passed rules for installation/upgrading/modernization of these systems but most have chosen to forego putting anything into law as the cost to the owner(s) of the building can be very high. The question we are tackling from our perspective is; should the installation of these systems be paid for from the Reserve Account?
Most often we advise that these system installations projects should not be budgeted for and paid from the Reserve Account as they are not current components; the past/current members have not been utilizing them, incurring their deterioration or having an opportunity to budget for them. The reserve account is best looked at as an account which monetarily offsets the deterioration of the existing components in the building. The installation of new components be that due to preference (swimming pool) or code/safety issues (sprinklers/earthquake retrofit) it really does not matter – if the component is not present in the building it should be paid for from a different fund; this could be called a capital improvement fund, special assessment, loan etc. If a Board decides to utilize the reserve funds for these types of projects then they are actually taking away from reserving for the current components in the building.
Additionally the cost of installing sprinklers or earthquake retrofits in a building (not new construction) is extremely high. We typically see even modest sized buildings of 20-30 units costing above $10,000 per unit. At these cost figures most reserve accounts would be wiped out in a very short period of time. This is especially problematic for the vast majority of communities which are already severely underfunded. There is a place for loans and special assessments and this is most definitely one of them – a community which decides to increase the safety of the building can first decide how to pay for it appropriately rather than just raid a reserve account – which can be very tempting as the reserve account balance increases to a perceived large dollar figure.
An excellent way to determine what the current component project liabilities are in the community is to have a reserve study completed. This perceived large reserve account balance is generally then put into perspective and what was once thought of as a large reserve account balance is more often than not redefined to be low-fairly funded. Removing large amounts of funds from the reserve account will only delay the inevitable special assessment/loan into the future and will place the community in a financially unstable position for many years to come.
As with all of these types of scenarios there is likely to be a time and place or an interpretation of a law/ruling which goes against our experiences related to these items – consulting with the appropriate professional (CPA, Attorney) before spending large amounts of the reserve account on a questionable project is advised – this will help to limit liability for Board members and provide a clearer understanding to the community as a whole on why the project must be paid for one way or another.