A reserve study is a critical tool for an association to plan for future capital repair needs. Adequately funded capital reserves can improve the ability of an association to fulfill its maintenance obligations without the need for special assessments or loans.
We specialize in working with community associations and property owners in problem-solving, repair/maintenance planning, pre-purchase due diligence, and cost estimating. We work with hundreds of community associations each year, including large-scale property owner associations, high-rise condominium properties, townhome communities, commercial owner associations, and non-profit entities. Services include reserve studies, transition studies, construction administration consulting, stormwater pond inspections, and engineering consulting.
What is a Reserve Study?
Reserve Studies include an estimate of future capital expenses and a financial analysis of the community’s reserve fund.
Capital expenses are non-annual repairs that the community association is responsible for—examples: Paving of private streets, townhome or condo roofing, and painting, site drainage improvements. Capital expenses are NOT: annual budget items, landscaping, cleaning, utilities, fees, or repairs due to natural disasters or other events covered in an insurance policy.
The estimate includes a timeline of when the repairs will be required and how much the repairs will cost. The timeline and cost estimates are derived from several sources: historical information from our clients, our network of local contractors, our local experience in construction management, and RS Means Construction Cost Data.
The financial analysis of the community’s reserve fund will evaluate the current reserve account balance and contribution rate to determine if it adequately achieves the funding goal. The analysis incorporates an estimate of inflation and returns on invested monies. We use the Cash-Flow Method where contributions to the Reserve Fund offset variable capital expenditures. We determine if the current funding meets a Baseline or Threshold Funding Goal and we provide recommended alternative funding strategies to achieve the funding goal.
How is a Reserve Study Completed?
Completing reserve studies involves several steps:
- Meeting with board of directors/community manager
- Building and Site Component inventory
- Condition of components
A reserve study will provide the community with a tool to help prepare for future expenses. Preparing for future expenses should help the community avoid special assessments.
Some state and local governments have laws requiring communities to have a reserve study. Fannie Mae and FHA also have some limited requirements for condominium communities to have adequate funds in a reserve account.
A reserve study will also provide a third-party assessment of the condition of the site components. This assessment will identify areas of concern in the community.
A reserve study also provides the community with a capital repair budgeting tool that will allow you to plan for future projects and invest reserve funds efficiently. The reserve study will provide an estimate of end of year fund balances; this information will allow you to invest reserve funds in CDs or other investment vehicles of appropriate term length with potentially better returns.
A Reserve Study Update is a site inspection to evaluate the condition of components and an update of the financial analysis. An update will re-establish and confirm remaining useful life estimates. These may vary from the original study due to climate variations. The update will include a financial analysis that may differ from the original due to economic conditions. Some states and local governments have laws requiring communities to update reserve studies periodically.
Our recommendation is to update reserve studies every three to five years or at a significant change in the responsibility of the association (adding amenities, increasing in size, etc.).