Guide to Reserve Studies

Reserve Studies provide a unique and valuable tool for Homeowner Associations to
protect their financial future through planning for expenses related to major Capital
elements of an Association. The information in this guideline will provide what Reserve
Studies are, how they work, and what they ultimately accomplish for your Association. In
some states laws have been enacted to require HOA’s, Condominiums, and Home
Owner Associations to create and adopt Reserve Studies which when followed protect
your Association from under funded or unprepared for repairs, replacements of
maintenance of significantly expensive common elements that would not be able to be
funded through the normal financial scale of the typical annual operating budget.

A complete Reserve Study combines a full inventory of all significant expense
infrastructure such as roofs, heating plants, roads, elevators and other large expense
common elements of your property. When created and followed, the Reserve Study
serves as a protection against unexpected and unwanted special assessments by
planning for when repairs or replacements will be required and having the funding in
place when the time comes.

Elements of Reserve Studies

 

   1. Physical Survey

The initiation of the survey begins with a meeting between the consultant and the
properties maintenance and financial leadership. A professional experienced in
conducting Reserve Studies begins by being introduced to the physical elements
of building systems by onsite personnel, typically a lead Maintenance person.
After reviewing the basic components and systems involved, a physical survey of
the buildings, grounds, mechanical system spaces and any other specific
architectural or mechanical improvement is made. Findings are recorded in detail
to enable an assessment of current conditions, anticipated remaining useful life,
and detail that will inform the Reserve Planner to assess repair or replacement
costs for each element, and anticipate when needed.

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   2. Financial Forecast

Using the findings from the survey, the Reserve Planner will forecast financial
models to anticipate the best estimate of the expense related to each component
in the survey’s repair or replacement findings. Using construction estimating tools
for local construction services the cost will be projected into a future, anticipated
date, and an inflation factor will be applied to enable that future cost to be well
anticipated, enabling the Association to be financially prepared without special
assessments.

   3. Funding Plans

The backbone of the Reserve Study is the Funding Plan that will prepare your
Association to establish what funding will be needed, and when. Once the scope
of the Study is fully articulated, projecting upcoming costs enables community
members to prepare by managing their financial plans to include assessing for
future costs, defraying some of those future costs through investment earnings
on accruing Reserve balances, and having the funding available when the time
comes. This provides a high degree of financial security to members, and is often
a key question during sales

   4. Funding Stress Test
The final element of the Reserve Study is a comparison of the current Reserve
Funds with the projected, fully funding balances needed in the future. Fully
funding means that the future financial requirements are projected to be able to
meet the demands of the future, though adequate funding for doing so is not in
place currently.

 

Benefits of A Fully Funding Reserve Study

   1. Adequate Reserves. Scheduling a capital improvement plan coupled with
preparing to have funding available greatly reduces the probability of Special
Assessments. Including a more affordable amount as part of each year’s
Operating Budget will be more welcome than the specter of infamous special
assessments which HOA’s and Condominiums were plagued by in earlier times.

   2. Quality of life is greatly enhanced through Reserve Study adoptions by reducing
the problem of deferred maintenance. Keeping things neat and tidy, with good
states of repair, is important to community members and again maintains value
and protects market values.

Ongoing Best Practices

Maintaining effectiveness and the benefits of the Reserve Study, Associations should
follow the following best practices:

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• Keep the Reserve Study updated, every 3 to 5 years or sooner if conditions present significant changes, wear or damage.

• Quality Evaluation of Components enables best chances of accurate forecasting and anticipated replacement or repair costs.

• Adaptability should be a feature included in the Study. The ability to change or modify elements, timing and other factors that may change should be able to respond to unexpected developments.

• Communication with the community should include open disclosure of the Reserve Study and provide information that promotes trust, and reinforces the importance of the Reserve Study discipline.

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Conclusion​

 

A professionally prepared Reserve Study will enable your Association to comply
with State Laws requiring them, and it is a very valuable tool to maintain the
Associations financial health. It’s ability to reduce the probability of special
assessments, deferred maintenance or other issues that produce friction and
conflict within Associations, and last but not least the ability to greatly reduce
chances for financial surprises to the community contribute enormously to the
quality of community life and member satisfaction.