A reserve study is a budget planning report for HOAs, condominiums, co-operatives, community development districts (CDDs), and other associations.
The reserves are the long lasting common elements that need to be replaced in community associations. In essence, a reserve study can be thought of as a road map for a community to have an idea of what reserve items to replace, when to replace them, and an estimate of how much the replacement will cost. Some of the most common items that would appear in a community’s reserves are roofing, painting, paving, common area HVAC, fencing, pools, entry gates, elevators, security systems, and recreation facilities.
A further way to explain reserve funding can be thought of like this: you are paying monthly to replace the roof (or any other reserve item) rather than in one lump sum payment at the end. The benefit to this is it charges the unit owners equitably for their use of their time living in the community. Waiting until the end of the reserve item’s lifespan is much more risky, as unit owners may or may not have enough money available.
Long Term Funding Schedule
The goal of a reserve study is to provide the association with a year-by-year funding plan to appropriately plan for the long-lasting items in the community. Typically, reserve studies project year-by-year funding for 30 years. A reserve study will also take into account changes in construction costs, interest rates, and inflation rates.
Another goal of a reserve study is to avoid special assessments for the association, or at the very least, minimize them. Special assessments are one time fees to unit owners to cover unforeseen expenses not accounted for in the budget or reserves.
Physical Analysis and Financial Analysis
A reserve study consists of two main parts: a physical analysis and a financial analysis. The physical analysis consists of a field inspection to verify the existing condition of the various reserve study components, their physical condition, and to verify component quantities. The physical analysis is comprised of the component inventory, condition assessment, useful and remaining life of reserve components, and cost estimates to replace the reserve items.
The second part is the evaluation and analysis of the association’s reserve balance, income, and expenses. This is referred to as the financial analysis. Most reserve studies will give the association some sort of overall rating. For example, the report may say the association is well-funded, or underfunded, or give a percent funded, like 65% funded. The goal of any association should strive to be 100% funded so any reserve items that need to be replaced can be at the appropriate time.
Reserve studies are a very important component for the long term financial health of a community association.