What is a Reserve Study?
The analysis of a community's major repair and replacement needs such as: roofing, siding, landscaping, painting, paving, sidewalks, recreation amenities, signage, or fencing, etc.. The study focuses on a specified period of time (20, 30, 40 years) and the development of a plan for accumulating resources (cash) to perform the repair or replacement work when it is needed.
What are the reasons for conducting and updating a Reserve Study?
A reserve study provides a documented plan for managing long-term maintenance and capital replacement obligations. It also serves as a budgeting tool by providing a schedule of necessary reserve fund contributions and a detailed annual estimate of capital repair and replacement expenditures. Finally, a reserve study can reduce an association's tax risk by providing essential documentation to support the accumulation of reserve funds (the source of which might otherwise be taxable).
What does a Reserve Study consist of and how is it conducted?
At Reserve Specialists, Inc. we follow the standards set forth by the Community Association Institute for the conduct of a reserve study and the presentation of the results of that study. Under those standards a reserve study is conducted and presented in two major sections: 1) a Physical Analysis, and 2) a Financial Analysis.
What is the Physical Analysis of a Reserve Study?
Professional Standards describe the Physical Analysis as the examination and documentation of the component inventory. It includes a determination of each component's condition (useful life and remaining life estimates), and each component's valuation (replacement cost estimates). The component inventory should remain consistent over the course of the community's life, while the condition and valuation will change from year to year.
What is the Financial Analysis of a Reserve Study?
Professional Standards describe the Financial Analysis as the development and presentation of a spending and funding schedule over the study period (typically 20 or 30 years) in the form of a monthly or annual reserve contribution.
What are the reasons for maintaining a Reserve Fund?
- It protects the owners' investments.
- Reserve Funds provide resources to maintain common areas and property and reduce deferred maintenance.
- It meets some legal, fiduciary, and professional requirements. A Reserve Fund may be required by:
- Certain secondary mortgage markets and insurers, for example: Fannie Mae, Freddie Mac, FHA and VA
- State statutes, regulations or court decisions
- Community's governing documents
- It reduces the need for special assessments.
- Owners may not be able to afford a large special assessment that would be required if reserves are insufficient to cover major repairs or replacements.
Is a Reserve Fund required?
Some state laws require home owners associations and/or condominium owners associations to fund a replacement service. Most often, an association's covenants require a replacement reserve be established and maintained. Condominium owners associations that wish to be FHA certified are required to "Provide for the funding of replacement reserves for capital expenditures and deferred maintenance in an account representing at least 10 percent of the budget."
How much should be in a Reserve Fund?
The amount of cash that should be maintained in a reserve fund is dependent on a number of factors, the most of which is quantity and type of common property maintained by the association. Other factors impacting the size of a reserve fund include the age of the community (and amenities), physical condition, and intensity of common property usage. An addition factor impacting the size of a reserve fund is the quality standards of the community.
How often should a Reserve Study be conducted or updated?
The general rule is every 3 to 5 years. However, certain events or extreme deviations from the planned expenditure schedule could, or should, prompt an association to consider a shorter period. A common event is weather damage to roofs or siding. In these circumstances, major repairs or replacements are made prior to the expected replacement date. Additionally, such repairs and replacements are often covered by hazard insurance. Since these circumstances can significantly change the long-term expenditure plan and the related need for funding, a previously prepared reserve study should be updated.
How much does a Reserve Study or Reserve Study update cost?
The cost of a reserve study is dependent on the same factors as those described in the discussion how much cash should be in a reserve fund. A reserve study involves listing out individual components of common property and then determining each component's current condition, long-term maintenance cost and eventual replacement cost. Communities with few amenities or with little common property will require less effort than those with many or complex amenities. Generally, prices for RSI Consultants reserve studies range from $2,500 to $6,000 depending on the factors described above.
Are we required to spend our Reserve Funds strictly in accordance with the Reserve Study?
The short answer is no. Keep in mind a reserve study is a plan or estimate much like an annual budget (and not a contract or binding agreement). Some associations follow the reserve fund expenditure and funding plan very closely. This is fine when the common property is simple and repairs and replacements are easily predictable. Often however, when amenities are complex or numerous (such as pools, club houses, docks, fitness centers, etc.) the need for repairs and replacement are less predictable, and less likely to follow the expenditure plan laid out in the reserve study or reserve study update. It is acceptable to use reserve funds as needed and defer expenditure of reserve funds if planned repairs are determined not necessary.