All too often Associations disregard the need to have their reserve studies updated. Or, worse yet, never have a reserve study completed at all. It is nearly impossible for Associations to accurately budget and fund for future capital needs if they do not have a complete picture of the future (schedule and cost of capital projects). Much like developing a personal investment strategy, there are two steps to ensuring a successful long-term financial strategy for your community.
- Identify your long-term needs – A professional reserve study provides a detailed, 30-year outlook of the timing and cost of future capital projects and a funding plan to offset such expenses.
- Periodically review your needs – A reserve study update looks at all the variables that can change over time that impact the reserve funding plan. Periodic reserve study updates ensures your forecast of future expenditures is up-to-date and accurate. This ensures that your community is funding at the correct levels.
Why have a reserve study? A comprehensive reserve study prepared by an independent engineer serves as a “blueprint” for the future. When properly prepared, a reserve study details both the anticipated timing and cost of future capital projects, all of which are derived from the current state of each common element, as well as local conditions and project costs. These future costs along with your Association’s current reserve funds are then utilized to develop a long-range funding plan. The result? A schedule of anticipated projects and recommended annual reserve contributions that your Association can depend on with complete confidence when creating your long-term financial strategy for funding capital expenses.
Any long-term financial strategy must account for changes over time. Changes in market conditions, ROI of each fund and actual investment contributions are examples of variables that result in requiring periodic adjustments to one’s personal investment strategy to remain on track. So it is for reserve studies which serve as a community’s long-term financial strategy for funding capital expenses.
Over time many variables affect the actual timing and cost of future capital projects. Having the most up-to-date picture of these projects provides a solid basis for adjusting future contributions and maintaining adequate reserves.
When should we update our reserve study?
Often, clients successfully manage their communities near-term needs for several years with the benefit of a quality reserve study. However, many variables or changes culminate in the need for a reserve study update including deferred or accelerated projects, lower than recommended reserves, changes in material and labor costs, unusual weather events that might impact remaining useful lives, as well as new products and technology. Board discretion (adding or deleting projects) can also require changes to ensure proper funding levels.
Updating every 3-5 years is considered management best practice and promotes your Association’s ability to develop and sustain a long-term financial strategy for maintaining its common elements in excellent condition through stable, yet adequate reserve contributions.