A reserve study is a tool used to provide an opinion of the annual reserve contributions required to support the reserve expenditures at a property. It provides a professional opinion of the remaining useful lives of association maintained components, the costs to repair or replace those components and the annual reserve contributions required to fund the reserve expenditures as they occur. Countless associations first initiate a reserve study when faced with funding adversity. However, it isn’t best practice to wait until funding needs arise. So, when should a reserve study be done?
Conducting a reserve study prior to development of the initial budget provides guidance to Boards in the early years of a community. Therefore, completion of a reserve study immediately upon turnover of financial control from the Developer to the Association is often the ideal time to conduct the initial study. Completing a reserve study while a development is relatively new ensures stable, consistent annual reserve contributions that are limited to inflationary increases; avoiding the need for dramatic jumps in contribution amounts.
Upon completion of the initial reserve study, it is prudent to periodically get the study up-to-date. The timing of major projects may dictate the timing of reserve study updates. Getting the reserve study up-to-date just prior to a major project can provide guidance to the board with respect to funding options, including the possible use of a loan. Reserve study updates completed shortly after capital intensive projects can guide an association towards re-building a sufficient reserve balance. Other factors that may prompt the need to get a reserve study updated include deferring or accelerating the timing of major projects as well as increased frequency of problems with major components.
Each property is unique, as is the appropriate interval between doing reserve study updates. An appropriate timeframe to update your reserve study will vary based on the specifics of your property. Based on our experience, we opine that older and more complex properties likely need to update their reserve study every 2- to 3-years. One example of this type of development is a highrise structure built prior to 1980. Whereas newer and less complex properties typically require updating their reserve study every 3- to 5-years as there are, generally speaking, fewer major components needing near-term replacement.