In 1960, in Salt Lake City, the first condo buildings in the U.S. were built. But it was in 1947, prior to this, that the concept of reserve funds was first born. First known as the Fire and Tornado Fund by insurance companies, early reserve funds were intended primarily for emergencies and disasters. However, it wasn’t until the late 1990s that the Community Associations Institute established uniform standards for reserve studies. In addition to these nationwide standards, many states have enacted their own reserve-study legislation, and new or evolving legislation continues to be a topic of discussion in various states.
The First Reserve Studies
In the early days, most reserve studies were conducted by property managers or board members because there was no established industry for the service. For physical inspections, much of the data was based on a contractor’s best guess, and in most cases, future replacement and repair costs and timelines were unscientific. 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 emerged in the late 80s and early 90s.
Reserve Studies Today
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, and reserve studies can help navigate these changes.
In the District of Columbia, for example, there is no requirement to conduct a reserve study or to fund reserves, though 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 of reserve funds required to cover 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 statewide (currently, Prince George’s County and Montgomery County require studies), along with the requirement to fund reserves at 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. As the new generation of managers and board members reshapes how they use reserve studies, demand for real-time information is driving the industry toward tools that enable interactive planning. The outdated method of sending a binder-sized report via snail mail no longer adequately serves communities.
Today, many reserve study providers offer interactive Excel sheets or cloud-based software that enable flexible reporting. 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 the study to be updated and kept current as real life happens and when budgeting season rolls around each fall, though it does not eliminate the need for periodic reserve study updates (the industry standard remains every 3-5 years for professional updates). By eliminating the limitations of a static report, associations now have a customizable report that provides a more comprehensive picture and enables 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 use for proper planning and financial decision-making. 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 reshape the reserve study industry for years to come.