A reserve study is a vital capital planning tool for HOAs and condominium associations that provides directional guidance and an in-depth analysis of community assets. The initial reserve study requires an onsite inspection and thorough examination of the reserve fund status to establish a prioritized schedule of capital improvement projects and a reserve funding plan to pay for them over the next 30-years. Less rigorous or meticulous reserve study updates — conducted every 3-to-5-years — are also important for helping associations to maintain an accurate forecast of future expenditures and to ensure adequate reserve funds.
For an association, having a reserve study is like having an investment strategy: you set aside funds today to cover future expenses. Success is dependent on understanding long-term expenditures and your ability to fund them through reserves.
Without a reserve study on hand, an HOA is flying blind into its future. To set its course, the HOA has a fiduciary responsibility to hire an independent reserve study company to do this important work and to leave behind a well documented plan that benefits current and future boards. Property managers come and go; board members frequently change, and the existing reserve study is there to help new decision makers understand the logic or reasoning behind earlier choices. A professional reserve study company will be available to discuss its work, the methodology used, and considerations that went into the study years after it was conducted. Additionally, reserve study specialists can support HOA boards by providing periodic updates to the original reserve study, ensuring the association remains on track.
Why are Reserve Studies Important?
Reserve studies are important because they help property managers and HOA boards see the big picture as it relates to property maintenance and financials. The upkeep of your association’s common elements, the pool you swim laps in every morning and the sidewalks you stroll every night, for example, is oftentimes, driven by the reserve study recommendations.
One of the primary responsibilities of the board of directors is to protect, maintain, and enhance the assets of the community association they serve. To accomplish this objective, associations must develop multi-year plans that help them understand their long-term budget needs and, at the same time, anticipate and responsibly prepare for the timely repair and replacement of common area components such as roofs, roads, mechanical equipment, and other portions of the community’s common elements.
Generally, a reserve study includes two important parts:
- A physical analysis. This portion includes a component inventory, a physical condition assessment of the common areas the HOA is responsible for maintaining and repairing, and life and valuation estimates. It also includes estimates of repair and/or replacement costs.
- A financial analysis. This portion of the reserve study identifies the status of the association’s reserve fund and presents an equitable funding plan to offset ongoing deterioration by ensuring the availability of sufficient funds to offset anticipated major common area expenditures as they occur. Complete financial health – revenue, expenses and reserve fund balance are all under the microscope.
How to Approach a Reserve Study
Look for a reserve study company with multi-disciplined engineers who have industry accreditation (CAI’s Reserve Specialist Designation and/or APRA’s Professional Reserve Analyst designation). HOA members should expect comprehensive plans that clearly explain the condition of their community association’s common elements and a funding plan to pay for future replacements.
Every study, according to the Community Associations Institute, should include at least seven items to ensure your community gets the directional guidance it needs for prioritizing capital projects and to maintain financial stability. CAI’s widely accepted standards help ensure every reserve study follows a similar methodology for providing key findings and recommendations. That’s the cake. But to help you truly understand a reserve study, you’ll want the frosting too. You’ll want a detailed report that utilizes tables, graphs, pictures, diagrams, spreadsheets and explanatory graphics, all of which make the report easy to understand. These items are important pieces of a reserve study and should not be considered as extras.
CAI’s List of Contents to be Included in a Reserve Study
- A summary of the association’s number of units, physical description and reserve fund financial condition.
- A projection of reserve starting balance, recommended reserve contributions, projected reserve expenses, and projected ending reserve fund balance for a minimum of 20 years.
- A tabular listing of the component inventory, component quantity or identifying descriptions, useful life, remaining useful life and current replacement cost.
- A description of methods and objectives utilized in computing the Fund Status and development of the Funding Plan.
- Source(s) utilized to obtain component repair or replacement cost estimates.
- A description of the level of service by which the reserve study was prepared.
- Fiscal year for which the reserve study is prepared.