Reserve studies are crucial for guaranteeing community associations’ financial stability. When done correctly, they help associations get ready for significant future repairs and establish a timeframe so that the membership will have the necessary cash set aside for such repairs. Reserve studies are, however, just what? What details does it offer, and whence does this data originate? To help your board fully comprehend the procedure and be able to plan for the future, we’ll go over the ins and outs of reserve studies in this post.
Financial reserves (capital reserves)
We must first explain capital reserves to understand them before we can discuss why we need reserve studies. To cover significant repairs that do not occur frequently, the organization set up capital reserves, which are effectively separate accounts. The replacement of roofs, asphalt pavement, and dredging and drainage enhancements are a few examples of these renovations. Regular expenses like utilities, maintenance, and landscaping are paid for out of the operating account, not from capital reserves.
So why do these kinds of repairs require a separate capital reserve account? The main reason for this is that these repairs are not included in the annual operating budget because they are not required every year and are frequently difficult to predict in advance. As a result, there is no straightforward way to include them in the annual operating budget.
Additionally, board members have a fiduciary duty to their associations, which includes helping to make sure that the organization is financially sound going forward. In truth, several states have laws requiring homeowner’s associations and other nonprofit organizations to establish capital reserve funds, but North and South Carolina don’t.
A Reserve Study’s Method of Completion
A reserve study will start with an examination of the community’s historical data and earlier capital repair efforts. The governing documents will be examined, questions about the governing documents will be discussed with attorneys, past bids on capital repair projects will be examined, as well as county tax records, plat maps, and site plans.
The following step is usually scheduling a site inspection. The person conducting the reserve study will meet with the board members and the community manager to conduct the inspection. During this time, they will take measurements, assess the current condition of the components, and determine whether short-term or long-term repairs are more likely to be required. A financial analysis report will be created by the study preparer after the site evaluation is finished. This will contain a projected cost for repairs as well as an assessment of how frequently and when these repairs are likely to be needed. The expected annual expenses will then be contrasted with the revenue from the current reserve, and if additional financing is required, funding alternatives will be developed.
The community manager will then receive the finished report and present it to the board. The individual who wrote the study will meet with the board to evaluate the materials, if necessary, to make any necessary changes and ensure that all is understood. This entire process normally takes 4 to 8 weeks to complete.
Why Do Reserve Studies?
You might be asking why community associations are thought to need this procedure so much. It helps the association prepare for future costs and avert exceptional assessments at the most fundamental level.
An HOA can invest reserve funds effectively by using a reserve study as a budgeting tool. A reserve study shows you balances over time, enabling you to make wise investment choices for the association. In addition to being a great maintenance guideline, a reserve study enables the organization to meet the criteria of some local governments and lenders. Additionally, it gives your organization a third-party professional recommendation for what it should be conserving regularly and acts as a kind of road map for any potential big initiatives.
