CAI Updated Reserve Study Terms and Definitions

Below are the updated terms from Community Association Institute July 2023.

David Bach & Associates 

• Adequate Reserves:
  • Definition: A replacement reserve fund and stable and equitable multiyear funding plan that together provide for the reliable and timely execution of the association’s major repair and replacement projects as defined herein without reliance on additional supplemental funding.
• Capital Improvements:
  • Definition: Additions to the association’s common area that previously did not exist. While these components should be added to the reserve study for future replacement, the cost of construction or installation cannot be taken from the reserve fund.
• Cash Flow Method (also known as pooling):
  • Definition: A method of developing a reserve funding plan where funding of reserves is designed to offset the annual expenditures from the reserve fund. To determine the selected funding plan, different reserve funding plans are tested against the anticipated schedule of reserve expenses until the desired funding goal is achieved.
• Common Area:
  • Definition: The areas identified in the community association’s master deed or declarations of covenant easements and restrictions that the association is obligated to maintain and replace or based on a well-established association precedent.
• Community Association:
  • Definition: A nonprofit entity that exists to preserve the nature of the community and protect the value of the property owned by members. Membership in the community association is mandatory and automatic for all owners. All owners pay mandatory lien-based assessments that fund the operation of the association and maintain the common area or elements, as defined in the governing documents. The community association is served and led by an elected board of trustees or directors.
• Components:
  • Definition: The individually listed projects within the physical analysis which are determined for inclusion using the process described within the component inventory. These components form the building blocks for the reserve study. Components are selected to be included in the reserve study based on the following three-part test:
    1. The association has the obligation to maintain or replace the existing element.
    2. The need and schedule for this project can be reasonably anticipated.
    3. The total cost for the project is material to the association, can be reasonably estimated, and includes all direct and related costs.
• Component Inventory:
  • Definition: The task of selecting and quantifying reserve components. This task can be accomplished through on-site visual observations, review of association design and organizational documents, review of association precedents, and discussion with appropriate representative(s) of the association. The Reserve Specialist, in coordination with the client, will determine the methodology for including these components in the study. Typical evaluation techniques for consideration include:
    • Inclusion of long-life components with funding in the study.
    • Addition of long-life components with funding at the time when they fall within the 30-year period from the date of study preparation.
    • Identification of long-life components in the component inventory even when they are not yet being funded in the 30-year funding plan.
• Component Method (also known as Straight Line):
  • Definition: A method of developing a reserve funding plan where the total funding is based on the sum of funding for the individual components.
• Condition Assessment:
  • Definition: The task of evaluating the current condition of the component based on observed or reported characteristics. The assessment is limited to a visual, non-invasive evaluation.
• Effective Age:
  • Definition: The difference between useful life and estimated remaining useful life. Not always equivalent to chronological age since some components age irregularly. Used primarily in computations.
• Financial Analysis:
  • Definition: The portion of a reserve study in which the current status of the reserves (measured as cash or percent funded) and a recommended reserve funding plan are derived, and the projected reserve income and expense over a period of time are presented. The financial analysis is one of the two parts of a reserve study. A minimum of 30 years of income and expense are to be considered.
• Fully Funded:
  • Definition: 100 percent funded. When the actual (or projected) reserve balance is equal to the fully funded balance.
• Fully Funded Balance (FFB):
  • Definition: An indicator against which the actual (or projected) reserve balance can be compared. The reserve balance that is in direct proportion to the fraction of life “used up” of the current repair or replacement cost. This number is calculated for each component, and then summed for an association total.
    • Example: For a component with a $10,000 current replacement cost, a 10-year useful life, and effective age of 4 years, the fully funded balance would be $4,000.
• Fund Status:
  • Definition: The status of the reserve fund reported in terms of cash or percent funded.
• Funding Goals:
  • Definition: The three funding goals listed below range from the most aggressive to most conservative:
    • Baseline Funding: Establishing a reserve funding goal of allowing the reserve cash balance to approach but never fall below zero during the cash flow projection. This is the funding goal with the greatest risk of being prepared to fund future repair and replacement of major components, and it is not recommended as a long-term solution/plan. Baseline funding may lead to project delays, the need for a special assessment, and/or a line of credit for the community to fund needed repairs and replacement of major components.
    • Threshold Funding: Establishing a reserve funding goal of keeping the reserve balance above a specified dollar or percent funded amount. Depending on the threshold selected, this funding goal may be weaker or stronger than “fully funded” with respective higher risk or less risk of cash problems. In determining the threshold, many variables should be considered, including things such as investment risk tolerance, community age, building type, components that are not readily inspected, and components with a remaining useful life of more than 30 years.
    • Full Funding: Setting a reserve funding goal to attain and maintain reserves at or near 100 percent funded. Fully funded is when the actual or projected reserve balance is equal to the fully funded balance. It should be noted that, in certain jurisdictions, there may be statutory funding requirements that would dictate the funding requirements. In all cases, these standards are considered the minimum to be referenced.
• Funding Plan:
  • Definition: An association’s plan to provide income to a reserve fund to offset anticipated expenditures from that fund. The plan must be a minimum of 30 years of projected income and expenses.
• Funding Principles:
  • Definition: A funding plan addressing these principles. These funding principles are the basis for the recommendations included within the reserve study:
    • Sufficient funds when required.
    • Stable funding rate over the years.
    • Equitable funding rate over the years.
    • Fiscally responsible.
• Initial Year:
  • Definition: The first fiscal year in the financial analysis or funding plan.
• Life Estimates:
  • Definition: The task of estimating useful life and remaining useful life of the reserve components.
• Life Cycle Cost:
  • Definition: The ongoing cost of deterioration which must be offset in order to maintain and replace common area components at the end of their useful life. Note that the cost of preventive maintenance and corrective maintenance determined through periodic structural inspections (if required) are included in the calculation of life cycle costs and often result in overall net lower life cycle costs.
• Maintenance:
  • Definition: Maintenance is the process of maintaining or preserving something, or the state of being maintained. Maintenance is often defined in three ways: preventive maintenance, corrective maintenance, and deferred maintenance. Maintenance projects commonly fall short of “replacement” but may pass the defining test of a reserve component and be appropriate for reserve funding.
    • Maintenance types are categorized below:
      • Preventive Maintenance: Planned maintenance carried out proactively at predetermined intervals, aimed at reducing the performance degradation of the component such that it can attain, at minimum, its estimated useful life.
      • Deferred Maintenance: Maintenance which is not performed and leads to premature deterioration to the common areas due to lack of preventive maintenance. This results in a reduction in the remaining useful life of the reserve components and the potential of inadequate funding. Typically, deferred maintenance creates a need for corrective maintenance.
      • Corrective Maintenance: Maintenance performed following the detection of a problem, with the goal of remediating the condition such that the intended function and life of the component or system is restored, preserved, or enhanced. Many corrective maintenance projects could be prevented with a proactive, preventive maintenance program. Note that when the scope is minor, these projects may fall below the threshold of cost significance and thus are handled through the operational budget. In other cases, the cost and timing should be included within the reserve study.
• Percent Funded:
  • Definition: The ratio, at a particular point in time clearly identified as either the beginning or end of the association’s fiscal year, of the actual (or projected) reserve balance to the fully funded balance, expressed as a percentage. While percent funded is an indicator of an association’s reserve fund size, it should be viewed in the context of how it is changing due to the association’s reserve funding plan, in light of the association’s risk tolerance and is not by itself a measure of “adequacy.”
• Periodic Structural Inspection:
  • Definition: Structural system inspections aimed at identifying issues when they become evident.
• Physical Evaluation:
  • Definition: The portion of the reserve study where the component inventory, condition assessment, and life and valuation estimate tasks are performed. This represents one of the two parts of the reserve study.
• Preventive Maintenance Schedule:
  • Definition: A summary of the preventive maintenance tasks included within a maintenance manual which should be performed such that the useful lives of the components are attained or exceeded. This schedule should include both the timing and the estimated cost of the task(s).
• Remaining Useful Life (RUL):
  • Definition: Also referred to as “remaining life” (RL). The estimated time, in years, that a component can be expected to serve its intended function, presuming timely preventive maintenance. Projects expected to occur in the initial year have zero remaining useful life.
• Replacement Cost:
  • Definition: The cost to replace, repair, or restore the component to its original functional condition during that particular year, including all related expenses (including but not limited to shipping, engineering, design, permits, installation, disposal, etc.).
• Reserve Balance:
  • Definition: Actual or projected funds, clearly identified as existing either at the beginning or end of the association’s fiscal year, which will be used to fund reserve component expenditures. The source of this information should be disclosed within the reserve study. Also known as beginning balance, reserves, reserve accounts, or cash reserves. This balance is based on information provided and not audited.
• Reserve Study:
  • Definition: A reserve study is a budget planning tool which identifies the components that a community association is responsible to maintain or replace, the current status of the reserve fund, and a stable and equitable funding plan to offset the anticipated future major common area expenditures. This limited evaluation is conducted for budget and cash flow purposes. Tasks outside the scope of a reserve study include, but are not limited to, design review, construction evaluation, intrusive or destructive testing, preventive maintenance plans, and structural or safety evaluations.
• Reserve Study Provider:
  • Definition: An individual who prepares reserve studies. In many instances, the reserve study provider will possess a specialized designation such as the Reserve Specialist® (RS) designation administered by Community Associations Institute (CAI). This designation indicates that the provider has shown the necessary skills to perform a reserve study that conforms to these standards. In some instances, qualifications in excess of the RS designation will be required if supplemental subject matter expertise is required.
• Reserve Study Provider Firm:
  • Definition: A company that prepares reserve studies as one of its primary business activities.
• Responsible Charge:
  • Definition: A Reserve Specialist (RS) in responsible charge of a reserve study shall render regular and effective supervision to those individuals’ performing services that directly and materially affect the quality and competence of services rendered by the Reserve Specialist. A Reserve Specialist shall maintain such records as are reasonably necessary to establish that the Reserve Specialist exercised regular and effective supervision of a reserve study of which he or she was in responsible charge. A Reserve Specialist engaged in any of the following acts or practices shall be deemed not to have rendered the regular and effective supervision required herein:
    1. The regular and continuous absence from principal office premises from which professional services are rendered; except for performance of field work or presence in a field office maintained exclusively for a specific project;
    2. The failure to personally inspect or review the work of subordinates where necessary and appropriate;
    3. The rendering of a limited, cursory or perfunctory review of plans or projects in lieu of an appropriate detailed review; and
    4. The failure to personally be available on a reasonable basis or with adequate advance notice for consultation and inspection where circumstances require personal availability.
• Site Visit:
  • Definition: A visual assessment of the accessible areas of the components included within the reserve study. The site visit includes tasks such as, but not limited to, on-site visual observations, a review of the association’s design and governing documents, review of association precedents, and discussion with appropriate representative(s) of the association.
• Special Assessment:
  • Definition: A temporary assessment levied on the members of an association in addition to regular assessments. Note that special assessments are often regulated by governing documents or local statutes.
• Structural System:
  • Definition: The structural components within a building that, by contiguous interconnection, form a path by which external and internal forces, applied to the building, are delivered to the ground. This is generally a combination of structural beams, columns, and bracing and is not included within the reserve study, although it is reviewed as part of the recommended periodic structural inspections. It is important to recognize that individual structural components which are not a part of the structural system, such as decks, balconies, and podium deck components may be included for reserve funding if they otherwise satisfy the three-part test.
• Useful Life (UL):
  • Definition: The estimated time, in years, that a reserve component can be expected to serve its intended function if properly constructed presuming proactive, planned, preventive maintenance. Best practice is that a component’s Useful Life should reflect the actual preventive maintenance being performed (or not performed).
• Valuation Estimates:
  • Definition: The task of estimating the current repair or replacement costs for the reserve components.