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Levels of Reserve Studies

Initially established in 1998, Community Associations Institute’s  (CAI) Reserve Study Standards establish minimum requirements for which all professional reserve studies are measured. These standards, part of which define the four levels or types of reserve studies, ensure that those serving the millions of community association homeowners throughout the country are presented with a consistent service and product regardless of their chosen service provider. Understanding the scope of each type of reserve study and potential limitations is essential to ensuring the service you are being provided sufficiently supports your association’s capital planning needs.

Level I Reserve Study

A level I reserve study, commonly referred to as a full reserve study, is the most comprehensive study available to associations. A credentialed reserve study provider conducts a physical inspection and financial analysis. The physical inspection includes development of a component inventory, quantification and/or measurements of each item, detailed condition assessments, and life and valuation estimates. From there, the status of your association’s reserve funds are analyzed against the need for near and long-term repairs and replacements, and a 30-year funding plan is developed to offset future capital expenditures.

Limitations of Level I Reserve Studies

This is the only type of reserve study service that requires the development of a detailed component list and quantification of each item. As such, this service is more costly than the remaining three options, but necessary for any association that has never completed a study. Furthermore, associations looking to switch reserve study providers will find that some firms, including Reserve Advisors, may not update another firm’s reports, as this allows us to verify not only the accuracy of the component inventory and related quantities and/or measurements, which is the backbone of any reserve study, but to also present capital planning recommendations that can stand the test of time.

Level II Reserve Study Update, With Site Visit

A level II reserve study is an update of a prior study. A credentialed reserve study provider conducts a physical inspection and financial analysis. During the site visit, the reserve specialist completes a review for general conformance of component quantities, and conducts detailed condition assessments and life and valuation estimates for each item. From there, the status of the association’s reserve funds are analyzed against the need for near and long-term repairs and replacements, and a new 30-year funding plan is developed to offset future capital expenditures.

Limitations of Level II Reserve Study Updates, With Site Visit

This service is nearly identical to a full (level I) reserve study with one minor caveat; the full reserve study establishes a component inventory and quantification of each item whereas the update (level II) checks for general conformality.

If the board is completely satisfied with their most recent reserve study, including the level of detail, ease of use, availability for ongoing support, and the accuracy of the component inventory (and quantification of each), it is generally advantageous to have the same firm conduct the update. They have pre-existing knowledge of your property and can evaluate the rate of component deterioration between studies. On the contrary, if the board is considering an alternate solution, it is important to find out how other firms will address any shortcomings from the prior study and related experience. CAI recommends completing an update no more than three years following the most recent study and every three years thereafter. Learn more about the benefits of updating your reserve study.

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Level III Reserve Study Update, No-Site-Visit

A level III reserve study is an update of a previous study but with a much narrower scope. This service does not include a site visit. The reserve specialist simply adjusts the schedule of capital projects for the components that were repaired or replaced since the last study. The existing reserve funding plan is adjusted to reflect the current reserve balance and the reserve specialist re-calculates future funding needs based on this limited information.

Limitations of Level III Reserve Study Updates, No-Site-Visit

This service is quite limited in scope, thus it is a cost effective solution to account for current economic conditions and to ensure the association is prepared for any near-term major projects. However, as this service relies on the untrained eye to report on property conditions, it has one significant limitation. This service should not be relied upon beyond two years from the most recent site visit from a reserve specialist. Why? Property conditions can deteriorate quickly and a miscalculation in reported property conditions can be detrimental to the physical and financial health of an association.

Furthermore, it should not be implied that this service can extend the timeline for conducting an update with site visit (level II). It is imperative that a reserve specialist periodically conduct an update with site visit to ensure changes in property conditions are properly assessed and accounted for.

Reserve Study Levels of Service

Level IV Reserve Study, From Plans

Lastly, level IV reserve studies apply only to communities that have not yet been constructed. Because there is no physical property to assess, this service acts solely as a budgeting tool for developers. The component inventory, quantities, and measurements are derived from site plans, and useful life estimates are based on industry standards. A 30-year funding plan is developed to offset future capital expenditures.

At Reserve Advisors, each level of reserve study service includes support with report implementation and continued guidance. Our reserve study consultants are always available to have a discussion with your board, to help them develop a deeper understanding of the study, as well as to discuss our findings and best practices to implement our recommendations. After all, what is the point of conducting a reserve study if the proper resources are not available to discuss the reserve study firm’s findings and to support the implementation of its recommendations?

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