How Often Should You Update Your Reserve Study?

Every community is ever-changing in its unique physical and financial status and needs. Plans change, components deteriorate, and economic factors can reshape how an association approaches maintenance and financial planning.

Because of these natural disruptions to a reserve study’s plans, updating your reserve study is crucial to maintain an accurate understanding of your community. The Community Associations Institute’s Reserve Study Standards, revised and republished in 2022, recommend updating your reserve study at least every three years.

Timing of Reserve Study Updates

Because each property is unique, so is the appropriate timing of reserve study updates. Based on our experience, older, more complex properties (e.g., high-rise buildings built before 1980) may need to update their studies more frequently than every 3 years. Newer, less complex properties can generally follow CAI’s 3-year update guideline, as there are likely fewer major components requiring near-term replacement.

For example, newer communities will only require minor repairs to long-lived assets, such as piping, since these systems are new. But for an older community, components such as piping may reach the end of their useful life and require full replacement. Piping replacement is an incredibly expensive project, so it is paramount that associations are prepared in advance to fund such projects.

By updating the reserve study more frequently, older associations can ensure they are properly funding reserves to support the timely replacement of critical components.

The timing of major projects can also contribute to the update timing. Getting a reserve study up to date before a major project can help guide funding options, including the possible use of a loan.

On the flip side, if a capital-intensive project has just been completed, an update can guide associations towards rebuilding a sufficient reserve balance. Deferring or accelerating the timing of major projects, or if a component is increasingly experiencing problems, can also prompt the need for a reserve study update.

In some cases, communities can safely wait longer than 3 years before updating. However, this decision should be made together with your reserve study provider.

Are Reserve Study Updates Required?

While it is best practice for every association to update its reserve study every 3 to 5 years, multiple states legally mandate reserve study updates. Reserve study updates, or a reserve funding schedule, are required in California, Colorado, Delaware, Florida, Hawaii, Maryland, Nevada, New Jersey, Oregon, Tennessee, Utah, Virginia, and Washington.

To learn more about the legal requirements for reserve studies by state, click here.

Types of Reserve Study Updates

Level II Reserve Study Update

A level II reserve study is an update of a prior study that includes the reserve specialist visiting the property and re-inspecting each component. The site visit allows the reserve specialist to ensure component quantities are accurate and to conduct detailed condition assessments and life and valuation estimates, as they would during an initial reserve study.

A level II study is nearly identical to a full reserve study, with one minor difference. Where a full reserve study establishes a quantified component inventory, level II updates simply ensure the inventory remains accurate.

CAI recommends a level II reserve study every three years to ensure the remaining useful life of each component and its respective funding plans remain accurate, as this update type allows the reserve study consultant to consider:

• • Changes in interest and inflation rates
  • Changes in the rate of deterioration of components (Did the rate of deterioration or development of issues increase or decrease since the last site visit? This will impact the timing of the remaining useful lives of major property components.)
  • Changes in code or ordinances (Does the building now require OSHA roof anchor installation/modifications, for example?)
  • Changes in board discretion with respect to the scope of projects (Will the association now redesign the lobby instead of simply replacing finishes?)
  • Changes in preventative maintenance practices (for better or worse)

Level III Reserve Study Update

A level III reserve study is an update of a previous study that does not include the reserve specialist visiting the property. Rather, the reserve specialist analyzes and adjusts the capital project schedule and funding plan based on which components were repaired or replaced since the last study. The existing funding plan is altered to reflect the current reserve balance, and future funding needs are then recalculated.

While a level III study is a cost-effective solution given current economic conditions, this update type should not be relied upon if the association has not conducted a study with a site visit in the last 2 years, due to its limited scope.

The condition of any component can deteriorate at an unanticipated rate, and if a component’s useful life is miscalculated in the study, both the project schedule and the funding plan will be inaccurate. This is why a full reserve study or a level II reserve study with a site visit is recommended every 3–5 years.

To learn more about all levels of reserve studies, click here.

Why Should You Update Your Reserve Study?

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  It ensures accuracy. Updating a reserve study ensures that the timing and cost of future capital projects are accurate.

• It helps maintain appropriate funding levels by incorporating changes in the remaining useful lives of the common elements and the estimated future costs of replacing them, thereby avoiding both underfunding and overfunding reserves.

  • Underfunding reserves inevitably leads to unpleasant options such as bank loans, large increases in homeowner dues, or special assessments.

  • Overfunding reserves penalizes current unit owners, as they are contributing more than their fair share.
• It provides continuity for boards. Board philosophy often changes due to board turnover. While one board may want to complete only necessary projects, the next board may want to make discretionary replacements, such as remodeling a clubhouse. By updating your reserve study, boards can keep all projects on track, whether they are necessary or discretionary.
• It can save associations time and money. Because reserve studies are based on anticipated replacement years, some projects may be pushed back. If a reserve study recommends replacing roofs in three years, but the roofs do not leak and are still in good condition, the board may elect to delay their replacement.

Updating your association’s reserve study is essential to the property and its residents’ financial and physical well-being. Updates keep funding plans and repair and replacement schedules on track, and current and future homeowners will benefit from stable, equitable reserve contributions. Boards can fulfill their fiduciary responsibilities by using an up-to-date reserve study to keep the association happy, healthy, and financially sound.