COAs and HOAs use Reserve studies and Reserve funding planning to anticipate costs for future repairs and replacements. They help ensure the best physical and financial interests of the community and are required by law in many states.
Because of hundreds of variables, each association requires different amounts of money to be placed in reserve to repair and replace maintenance tasks on schedule without special assessments or loans. By conducting Reserve studies, an association can more accurately determine and assemble adequate reserves to fund necessary repairs and replacements so that funds are there when needed.
Reserve studies provide an estimate of the costs of repairing and replacing major common area components (such as roofs or pavement) over their projected life.
An association’s Reserve Study examines:
- What are the association’s repair and replacement obligations?
- What are the costs and timing of replacements?
- What is the availability of cash resources (Reserve funds)?
The Reserve budget information supplements the association’s annual operating budget. It can also be a useful and important part of evaluating the value of a property by buyers because it gives them a more accurate and complete picture of the association’s financial strength and market value. Proper reserve planning protects against declining property values as it should eliminate deferred maintenance and inability to keep up with the aging of components.
A Reserve Study shows buyers, lenders, and others how management of the association has made provisions for non-annual maintenance requirements. Preparing a Reserve Study calls for explicit association decisions on how to provide for long-term funding, setting aside funds on a regular basis for non-annual maintenance requirements. A well-executed Reserve Study can also function as a maintenance planning tool for the association.
A Reserve Study is made up of two parts:
- The Physical Analysis (information about the physical status and repair/replacement cost of the area components the association is obligated to maintain).
- The Financial Analysis (examination of the association’s Reserve income and expenses)
Reserve studies typically fit into one of three types:
- Update, With-Site-Visit/On-Site Review
- Update, No-Site-Visit/Off-Site Review
A Reserve Study usually includes the following contents:
- Summary of the Association (number of units, physical description, and the financial condition of the Reserve Fund).
- Reserve Projections (Reserve starting balance, recommended Reserve contributions, projected Reserve expenses, and the projected ending Reserve fund balance for a minimum of 20 years).
- Listing of the Inventory Elements (quantity or identifying descriptions, useful life, remaining useful life, and current replacement cost).
- Methods and Objectives (used in calculating the fund status and in the development of the funding plan).
- Sources (used to get component repair or replacement cost estimates).
- Description of the Reserve Study (Full or Updated).
- Fiscal Year of the Reserve Study.
Maintaining a Reserve Fund not only meets legal, fiduciary and professional requirements, it also minimizes the need for special assessments and enhances resale values.