A professional, independent reserve study is an invaluable resource that provides directional guidance for boards as they make decisions that support both the near and long-term health of the communities they serve. From identifying when and how reserve funds are spent to setting annual assessments, a reserve study is an invaluable tool for those managing and running community associations.
Reserve studies provide a comprehensive report containing what may seem like an endless amount of information about your association, and can be understandably intimidating to digest. While all the details provided are valuable, reading and utilizing a reserve study report doesn’t have to be an overwhelming task. If you’re looking to get to the meat and potatoes of your report, this guide is for you.
You’ll want to begin by reviewing your association’s current financial conditions, which is the starting point for the rest of the report’s details. The executive summary will note the starting reserve balance, current annual reserve contributions, and serves as the basis of the reserve expenditure and funding plan options.
Once you have a grasp of current financial conditions, it’s time to review near-term and capital-intensive reserve expenditures. The reserve expenditures table details each reserve component and its quantities, useful lives, remaining useful lives, and reserve expenditures for the next 30 years. This detailed component inventory presents a prioritized replacement schedule including itemized costs, with expenditure placement generally reflecting recommended project prioritization or order.
It can be helpful when initially reviewing the report to focus on expenditures during the next five years, and subsequently focus on capital-intensive expenditures during years 6-30. Report narratives detail the condition of each component, including photos, to help you understand the condition of your association.
Once you have reviewed the expenditures table, you can begin diving into the recommendations to help you follow the expenditure plan. The executive summary and reserve funding plan both contain funding recommendations and information. The executive summary presents written recommendations, a recommended reserve funding table, and a graph. The graph presents reserve contributions, expenditures, and balances throughout the study’s duration. The beginning reserve balance and the projected forecast of capital expenditures dictate the recommended funding levels.
Now that you know where and when your reserves will be spent and how much you will need, it’s time to determine how to fund them. Ideally, reserves will be funded by implementing the recommended reserve contribution increases, but in some cases, loans or special assessments may become necessary to complete capital projects on time. At the end of the day, we simply want to help Board members make informed decisions concerning which projects are on the horizon and their potential costs.
Keeping the schedule of expenditures and funding plan current provides management and the board with the most complete picture of the association’s near-term project needs and long-term financial status. Surely most associations will, at some point in the future, find themselves deferring projects and/or not meeting their reserve study’s recommended level of reserve contributions. Ultimately, their success is measured by the ability to weather such differences while adjusting the long-term funding strategy to ensure reserves are adequately funded and common property is maintained in excellent condition for decades to come.