Corporate Headquarters

735 N. Water Street, Suite 175

Milwaukee, WI 53202


Mitigating Financial Risk: Reserve Studies, Lending, and Insurance

Inspecting FinancesIn the ever-evolving landscape of community associations, one trend is becoming increasingly apparent: lenders and insurers are focusing on reserve studies. Traditionally overlooked and used as an internal planning tool, reserve studies are now capturing the attention of external individuals and institutions, particularly lenders and insurance companies. This shift in focus is driven by a growing awareness of the importance of proactive risk management. 

One key driver of this trend is the recognition that neglecting to conduct or follow a reserve study can have significant financial repercussions. Reserve studies comprise two parts – a physical inspection of your association’s common property, and a financial analysis of your current reserve fund status and creation of a long-term capital plan. If associations adhere to their reserve study’s recommendations, not only will they be able to address any physical areas of concern, but they will have adequate funding to complete projects on time and avoid deferring maintenance. Associations that fail to adequately budget for necessary repairs and maintenance often find themselves facing costly surprises down the line – preparing to avoid an emergency is much cheaper than dealing with one.  

Structural issues have also emerged as a major area of focus, with lenders increasingly scrutinizing the structural integrity of the property. Ensuring the structural soundness of an association’s buildings is essential to mitigating risk, and lending standards are becoming stricter as institutions place greater emphasis on conducting thorough inspections and assessments. Communities with known structural issues or deferred maintenance to structural components pose a financial risk to both lenders and potential buyers, who could face hefty special assessments.  

As a result, lenders are requiring greater transparency and accountability from associations, including conducting reserve studies that accurately assess the long-term maintenance needs of a property. Recently, Fannie Mae and Freddie Mac released a list of blacklisted properties that are ineligible for lending due primarily to structural issues, deferred maintenance, litigation/prelitigation activity, and failure to conduct reserve studies and fund reserves properly. If an association fails to adequately reserve and instead relies on special assessments to fix expensive structural issues, it is more likely that a homeowner will become unable to afford their loan. 

Insurance companies are also taking note of the importance of reserve studies in assessing risk. By examining the adequacy of reserve funds in relation to projected expenses, insurers gauge the association’s ability to cover potential claims without resorting to special assessments or loans. Components with deferred maintenance or inadequate funding are more susceptible to failure, leading to increased likelihood of insurance claims. By incorporating data from reserve studies into their risk models, insurers can adjust premiums accordingly and tailor coverage to address specific vulnerabilities within the community. Properties that fail to demonstrate sufficient financial preparedness for current or future repairs and maintenance may face higher premiums or coverage restrictions to account for increased risk exposure. In the worst-case scenario, insurance providers may opt to drop the property and not renew coverage.  

Considering these developments, managers and boards alike should be increasingly recognizant of the value of proactive planning and budgeting. Conducting regular reserve studies, recommended by CAI to be updated with a site visit every three years, helps associations identify potential maintenance issues early on and allocate funds accordingly. This helps to safeguard the long-term value of the property and ensures compliance with lender and insurance requirements.  

Additionally, a proactive budgeting approach allows for the timely completion of capital replacement and maintenance projects, which can enhance an association’s overall attractiveness to prospective buyers. Communities with well-maintained infrastructure and documented, healthy reserve funds are perceived as more desirable investments, commanding higher market value through structural and financial reliability.  

The growing focus on reserve studies reflects a broader shift toward risk management and financial diligence in the community association industry. As lenders and insurance companies place greater emphasis on structural integrity and financial adequacy, boards and managers must adapt by prioritizing proactive maintenance and budgeting practices through conducting regular reserve studies. By doing so, not only can risks be mitigated, but the value of the property can be maintained for years to come.  

Sign up for our Newsletter