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How Is a Reserve Study Conducted?

A custom reserve study includes a physical analysis of the common property elements and a financial analysis of the reserve funding needed to cover future capital expenditures to repair or replace property elements.

Physical Analysis

The physical analysis includes a component inventory, condition assessment and life and valuation estimates.

To prepare a customized reserve study, a Reserve Advisors engineer conducts an information-gathering meeting at the property, with the property manager or a board member, or both. The meeting allows the engineer to secure important background on the property. It's also an opportunity for the property manager or board member to describe any problems the property is experiencing.

After the meeting, the engineer performs the property inspection to record, measure and assess the current condition of each common element. The engineer will pay special attention to problem areas.

As part of the physical analysis, the engineer takes photos to document the condition of the common elements. Based on the physical analysis of each element, the engineer estimates a remaining useful life and recommends when repairs or replacements need to be done.

Financial Analysis

Reserve Funding Methods

There are two industry-accepted methods for calculating a reserve funding plan - the Component (or straight-line) Method and the Cash Flow (or Pooling) Method. Both methods are approved by the Association of Professional Reserve Analysts and Community Associations Institute.

The component method divides the current replacement cost of each common element by the number of years before replacement (remaining life) to arrive at the necessary annual funding amount for each common element. The component method results in annual reserve budgets which vary from year to year. As such, the annual funding amount must be recalculated each year. Component method reserve funding also results in higher than necessary reserve balances.

The cash flow method pools all of the future replacement costs of the common elements and determines a funding plan that is designed to offset the collective (or pooled) future costs from the reserve fund. This method:

  • utilizes reserve funds more efficiently
  • provides a relatively stable level of reserve funding
  • results in realistic and more reasonable reserve contributions

How Reserve Advisors Approach Benefits You

While Reserve Advisors is fully versed in both methods and occasionally conducts component method plans upon request, we highly recommend, and most of our clients prefer, the cash flow method. Our financial analysis determines an adequate, not excessive, reserve funding plan. The analysis compares reserve expenditures with the association's existing reserves to establish a funding plan that is reasonable.

Key elements of Reserve Advisors adequate and reasonable reserve funding plan are:

  • Maintaining a threshold funding goal of realistic year-end reserve balances. This funding goal, which sets a minimum threshold or dollar amount, is determined by the engineer to ensure your reserve fund will always have a positive balance, even in years with significant capital projects.
  • Applying interest earned on the reserve fund
  • Using local costs for materials and labor
  • Applying inflation to future cost estimates

Applying a threshold funding goal to existing reserves, local construction costs, future inflated replacement costs and interest earnings produces the most accurate reserve funding plan.