As a tool for long-term capital planning, reserve studies assist boards in foreseeing and preparing for the maintenance and replacement of their community’s shared assets. An extensive physical investigation of the property and a careful review of the available reserve money are both parts of a reserve study. The resulting reserve study report includes a prioritized list of capital projects and a reserve funding strategy to cover expenditures for maintaining and replacing common assets over the following 30 years.
The physical and financial analyses are the two components of the reserve study. This report, which contains an evaluation of the condition of the components of the commonly owned property as determined by the particular association’s CC&Rs and bylaws, is frequently compiled by an external expert agency for the advantage of administrators of a property with multiple owners, such as a Condominium Association or HomeOwners’ Association (HOA).
The creation of reserve studies is not restricted to condominiums; it is also possible for resort (shared holiday ownership) properties, apartment buildings, places of worship, private schools, private (golf/social) clubs, and office parks.
Reserve studies are essentially planning instruments created to assist the board in anticipating and preparing for the property’s major repair and replacement projects. The repair of the building’s roof, the replacement of the boiler, the retrofitting of the fire alarm systems, and the resurfacing of the roads are a few examples of such undertakings.
The goal of a reserve study
An accurate prediction of when large expenses will arise and a better understanding of what major expenses to anticipate are the goals of a reserve analysis for people in charge of property upkeep. With this knowledge, the residents’ association board or manager can design a budget so that association members will contribute their fair share to the reserve, intended to counteract the ongoing, slow deterioration of the reserve component of the association assets and avoid being caught off guard by components that often deteriorate over time and in plain sight.
The reserve study also offers significant yearly disclosures to association members (and potential buyers) regarding the state of the common area components and the readiness (strength) of the reserve fund.
An HOA reserve analysis serves as a guide that enables long-term, cost-effective decisions to be made. The International Capital Budgeting Institute has set standards for calculating the percent funded as well as the Community Association Institute.
There are three different ways to do this computation, and regrettably, the results might vary significantly depending on how each method is applied. Unfortunately, anyone examining the fairness of assessments between years for a cash-flow approach study would discover that the suggested assessments defraud future owners to benefit current owners because inflation is improperly taken into account.
A reserve study should adhere to a condominium association’s guidelines, among others:
- To provide budgeting data that theoretically guarantees that enough money will have been assessed to pay for common element replacement projects without special assessments when they become due (preferably without significant over-funding).
- To equitably distribute the increased costs of replacement projects among owners in proportion to their percentage ownership of common features for the timeframe of that ownership, as measured in any year’s constant dollars or in hours to earn at any pay rate, assuming that owner pay increases at the same rate as component replacement costs.
- To provide a theoretically precise funded percentage, using the component cost inflation rate(s) used in the study.
A condominium association will find little benefit in the study if these three criteria are not satisfied. Present “cash-flow” approaches cannot do so since they do not adequately account for inflation.
