Throughout the reserve study process, you’ll hear a lot of terminology that may be unfamiliar to you. Whether you’re just learning what a reserve study is or you have your first report in hand, here is a list of the terms you need to know.
Reserve Study: A budget planning tool that identifies all the components a community association is financially responsible for, the status of the reserve fund, and a funding plan to offset anticipated expenditures as they apply to the identified components. It includes a physical condition assessment of the components and a prioritized list of capital repair and replacement projects. Essentially, a reserve study is a comprehensive examination of a property’s physical components and financial needs and a 30-year capital plan to meet those needs.
Condition Assessment: A reserve specialist conducts condition assessments for all reserve components during the physical inspection portion of the reserve study. Condition assessments document the current condition of the component based on a visual, non-invasive evaluation.
Component/Asset: A physical or functional element of the community that is the financial responsibility of the association and has a finite useful life. Individual unit owners do not own components/assets, and the associations’ reserve budget pays for repairing or replacing these elements. These items deteriorate with age and do need to be maintained or replaced accordingly. Common examples include elevators, pavement and roads, siding, HVAC, and amenities.
Long-Lived Component/Asset: Components are referred to as “long-lived” if their useful life extends beyond the 30-year scope of the reserve study. If a component will not need repairs or replacement within 30 years of the reserve study being conducted, they are considered “long-lived.”
Life Cycle Costs – Life cycle cost is the total cost of owning a component over time. This includes the initial purchase cost but also includes operating and maintenance costs, energy costs, repair or replacement costs, and the cost of disposing of or removing the component at the end of its life cycle. The true cost of ownership for a component is best conveyed using life cycle cost.
Capital Replacement Project: A project that involves the replacement or significant upgrade of a capital asset or component. These projects are ideally planned and executed as part of an association’s long-term capital plan as they typically involve significant financial investments. Capital projects are specific in scope as they work to enhance the functionality, efficiency, or safety of the component and association as a whole.
Replacement Costs: When it comes to capital planning, replacement costs are used to estimate the cost of a capital replacement project which plans for the replacement of the component with a new, equivalent item. Accurate replacement costs are crucial for ensuring that capital plans can be followed efficiently. When it comes to insurance, accurate cost estimates are necessary so that coverage reflects the cost of replacing the component with a new one of similar quality and functionality, ensuring that the association can fully recover from a covered loss.
Useful Life & Remaining Useful Life: Useful life and remaining useful life are similar concepts but refer to different aspects of a component’s life span. Useful life is an estimate made at the beginning of a component’s life and determines how long the component will be operational. It uses various depreciation methods to determine the period over which the cost of the item will be spread over. Remaining useful life is assessed at any other point during the component’s operational life, and is used to estimate how much longer the component will remain operational based on its current condition, maintenance history, and evolving usage patterns. Essentially, useful life is a fixed estimate made at the beginning of an asset’s life, used primarily for accounting and depreciation purposes. Remaining useful life, on the other hand, is a dynamic estimate assessed during the asset’s operational life to determine when it is likely to require replacement or significant maintenance.
Reserve Fund: When living in a community association, unit owners pay monthly dues that go into the association’s reserve fund. The reserve fund is used to pay for the upkeep and replacement of the community’s components. Regardless of how long a unit owner resides in the community, properly administered dues collect funds in a way that ensures each owner is paying their fair share for component projects regardless of when they are completed.
Adequate Reserves: The Community Associations Institute (CAI) defines adequate reserves as a reserve fund and stable multi-year funding plan that together provide for the timely execution of major repair or replacement projects without relying on supplemental funding (special assessments, loans, etc.)
Reserve Specialist: Reserve Specialist is a designation given by CAI to individuals who have “prepared at least 30 reserve studies within the past three calendar years, have the appropriate level of education and experience, and have committed to a high level of ethical and professional standards.” Reserve specialists are the most qualified professionals to conduct reserve studies, per CAI’s Reserve Study Standards.