The Evolution of Reserve Studies

Waterfront CondoIn 1960 in Salt Lake City, the first condo buildings in the U.S. were built. But it was prior to this, in 1947, that the concept of reserve funds was first born. First referred to as the Fire and Tornado Fund by insurance companies, early reserve funds were meant primarily for emergencies and disasters. However, it wasn’t until the late 1990s that uniform standards for reserves studies were established by the Community Associations Institute. In addition to these nationwide standards, many states have enacted their own legislation regarding reserve studies, and new or evolving legislation continues to be a topic of discussion in various states.

In the early days, most reserve studies were conducted by property managers or board members, because there was not yet an established industry for the service. In terms of physical inspections, much of the data was taken from a contractor’s best guess and in most cases, future replacement and repair costs and timelines were unscientific in nature. Additionally, early studies generally did not include any type of reserve funding plan. As the need for a more scientific approach to reserve studies arose, professional reserve study firms came into existence in the late 80s and early 90s.

As the reserve study industry evolved, the process was streamlined into what it is today, with studies including both capital expenditure and reserve savings schedules. Parallel to the evolution of reserve funds and reserve studies lies increased scrutiny at the lending level. State regulatory agencies have continued to establish and modify reserve requirements over the years, which reserve studies can help to navigate. 

In the District of Columbia, for example, there is no requirement to conduct a reserve study or to fund reserves, though the disclosure of current reserve funds or lack thereof is required in annual budgets. 

On the other hand, Virginia requires that an association commission a reserve study at least once every five years to determine the amount in reserve funds required to keep up with necessary repairs or replacements of association-maintained components. Additionally, boards must review the study annually and make adjustments where necessary to maintain adequate reserve funds. 

Maryland is following suit and passed a bill in mid-April 2022 requiring reserve studies state-wide (currently, Prince George’s County and Montgomery County require studies), along with the requirement of funding reserves to the levels recommended in the study. These requirements will go into effect once signed into law.

As reserve study requirements continue to evolve, so do reserve studies themselves, most notably in the realm of technology. Because the new generation of managers and board members are reshaping the way they use reserve studies, a demand for information in real-time is driving the industry towards delivering tools that allow for interactive planning. The outdated method of sending a binder-filled report via snail mail is no longer sufficiently serving communities. 

Today, many reserve study providers include interactive excel sheets or cloud-based software that allow for report flexibility. With the ability to customize capital expenditure and reserve funding schedules, boards are no longer cemented into the recommendations of their initial or possibly outdated report. This allows for the study to be updated and kept current as real-life happens and when budgeting season rolls around each fall, though this does not eliminate the need for periodic reserve study updates (industry standard remains every 3-5 years for professional updates). By eradicating the limitations of a static report document, associations are now presented with a customizable report that presents a more comprehensive picture and allows them to make the most informed decisions possible. 

As awareness surrounding reserve studies has grown exponentially and legislation continues to change, more property managers and board members are proactively planning for capital projects. Reserve studies have become the primary tool associations utilize for proper planning and making financial decisions. Excel sheets with formulas and cloud-based software have dramatically improved the quality and continual accuracy of reserve study reports, and we can only predict that technological advancements will continue to re-shape the reserve study industry for years to come. 

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