Q: What is a Reserve Study?
A: A Reserve Study is the art and science of anticipating and preparing for major common area repair and replacement expenses. A Reserve Study allows the Board and Management of Association-governed communities to offset the ongoing deterioration of the common area components with Reserve Funds to ensure their timely repair or replacement. A well-crafted Reserve Funding plan will ensure that irregular Reserve expenses are offset by ongoing, regular Reserve contributions, avoiding the need for Special Assessments.
Q: I am a homeowner; why should I care about reserve funds?
A: Some elements of the association will eventually need to be replaced. Reserve funding helps to ensure costs are planned out carefully, reducing reactionary cost allocations and over-spending. Also, reserve studies are often required by federal regulations, financial institutions to which the association relies on for funding, or to maintain the association’s non-profit status. Reserve studies may also help to avoid special assessments that are necessary to replace larger community components. Finally, reserve studies may help to increase home values by ensuring the community’s aesthetics are maintained.
Q: When should associations update a reserve study?
A: At a minimum, associations should update its reserve study every three years. Other opportunities to update a study would include: before making improvements or major repairs; if the number of paying members changes; if there is a change in ownership or management companies; if interest or inflation rates change; or after a major emergency.
Q: What are the main advantages of conducting a reserve study?
A: A reserve study provides a detailed inventory of community assets and identifies future replacement costs. It ensures that the association has conducted the necessary advanced planning to have the funds available for repair and replacement of common areas. Reserve studies are a critical tool for boards of directors and property managers to utilize in preparing to avoid financial disasters.
Q: What are the common types of reserve studies?
A: There are three major categories of reserve studies: Full, Update (With-Site-Visit/On-Site Review), and Update (No-Site-Visit/Off Site Review).
· A Full Reserve Study requires the reserve company to conduct a comprehensive component inventory, a condition assessment, and useful life evaluation. For a full study, Castle Reserve Studies will conduct at least one on-site inspection, meet with property managers, and board members when requested.
· An Update (With-Site-Visit/On-Site Review) requires the reserve company to verify the component inventory, a condition assessment with on-site review, and useful life evaluations.
· An Update (No-Site-Visit/Off Site Review) requires the reserve company to conduct useful life evaluations and funding plans.
Q: What are the main components of a reserve study?
A: According to the Foundation for Community Association Research, a reserve study should include the following:
· A summary of the association, including the number of units, physical description, and the financial condition of the reserve fund.
· A projection of the reserve starting balance, recommended reserve contributions, projected reserve expenses, and the projected ending reserve fund balance for a minimum of 20 years.
· A tabular listing of the component inventory, component quantity or identifying descriptions, useful life, remaining useful life, and current replacement cost.
· A description of the methods and objectives utilized in computing the fund status and in the development of the funding plan.
· Source(s) utilized to obtain component repair or replacement cost estimates.
· A description of the level of service by which the reserve study was prepared and the fiscal year for which the reserve study was prepared.
Q: What time of year should we do our Reserve Study?
A: A Reserve Study should be completed prior to submitting any budget. Because the Reserve Study is a planning and funding tool, adequate time should be allowed between finalizing the study and preparing annual budgets. It is important to give the association time to select a Company and allow for a month to review the completed report. Sufficient time is also needed to incorporate the funding recommendations into the budget for the upcoming Fiscal Year.
Q: How Much Does a Reserve Study Cost?
A: There are four factors that determine the cost of a Reserve Study:
· Association type and size (Single Family homes, Condominiums, Master Community and # of units)
· The number of common area amenities (Pool, Spa, Clubhouse, Playgrounds, Tennis Courts, Lakes, etc.)
· Location of Property (whether the property is out of state or overnight/lengthy travel is required)
· When the study will be needed (Regular versus Rush)
Q: Which Components Belong in the Reserve Study?
A: The Reserve Component List forms the foundation of any Reserve Study. Now part of the National Reserve Study Standards, there is a four-part test to determine if a component is appropriate to designate for reserve funding. To be funded, a component must pass all four of the tests:
· (1) The component must be a common area maintenance responsibility, as defined in the Association’s governing documents or a well-established Association precedent.
· (2) The component must have a limited Useful Life (UL).
· (3) The component must have a predictable Remaining Useful Life (RUL).
· (4) The component’s Replacement Cost ($) must be above a minimum threshold amount.
Q: What is % Funded?
A: No two associations are the same and a Reserve Fund balance that is sufficient for one Association may not be sufficient for another. But when an Association’s actual Reserves on hand are compared to its computed Reserve requirements, a relative measuring scale called “Percent Funded” is established. This relative Reserve Fund strength measurement is now part of National Reserve Study Standards and independent of the funding (i.e., cash flow, straight line, etc.) method.
% Funded = Reserve Fund Balance (actual)/Fully Funded Balance (computed)
The Fully Funded Balance (FFB) is computed by multiplying the current replacement cost of each component by its fraction of life “used up” and summing them all together % Funded = 100 (ideal) when the Reserve Fund Balance (actual) is equal to the Fully Funded Balance (computed).
Q: What is the National Reserve Study Standards?
A: A Reserve Study that is prepared in accordance with National Reserve Study Standards will communicate three key results:
(1) A Component List detailing the scope and schedule of the items that the association is obligated to maintain.
(2) A calculation of Reserve Fund strength (also known as % funded) .
(3) A Funding Plan that allows for timely repairs & replacements, with an emphasis on avoiding special assessments.
The Component List is compiled through a thorough, detailed inspection of the Association’s actual physical assets, such as buildings, streets, amenity areas, and so on. Photographs are taken to establish the current condition and measurements are taken to help define the scope of all expected projects. Schedule is determined by assigning a Useful Life and Remaining Useful Life to each line item. Using this framework of data, current repair and/or replacement costs are estimated and a Funding plan is determined that allows for the various project identified in the study to be completed on schedule. Reserve Studies have become an integral part of the annual budgeting process for Associations across the country. Associations that are well-prepared for large expenses are easier to manage and are more desirable to prospective buyers. More importantly, current residents of these associations will be less exposed to the financial difficulties that result from poor planning. A community association is not an apartment complex. All owners collectively share the responsibility of protecting the value of the association’s shared assets. Proactive, responsible board members must embrace their fiduciary duty to do right by the people they represent, and association managers must help put their clients in a position to make wise decisions.