What is a reserve study? A reserve study is a budgeting tool designed to help decision makers understand the proper dollar amount that should be regularly contributed to the association’s reserves in order to repair, replace, and restore the major components.
A reserve study is comprised of two parts, a Physical Analysis and Financial Analysis (see below).
Why is it important to obtain a reserve study for your association? Many association Boards understand that major components will eventually need to be replaced. What they don’t understand is the amount that should be put into savings to pay for these future projects. While a reserve study cannot predict the future with total accuracy, it does contain valuable information so the Board can develop a reasonable budget with a proper long-term funding plan.
Many states have legal requirements for associations to obtain a reserve study. However, even if your state does not have a specific regulation, most associations have governing documents that require the Board to establish an adequate reserve fund and a Board is typically held to “prudent business practices”. This means that a Board has a fiduciary responsibility to know what an adequate reserve funding plan should be, and that is exactly what a reserve study tells them.
How often should an association obtain or update its reserve study? Many states have legal requirements ranging from three to six years. It is therefore important to understand your state’s laws. If your state has no such requirement, then GeoReserves recommends every five years for single-family home communities or three years for condominium or townhome communities in which the association is responsible for the residential building exteriors. Master-planned developments with thousands of units should have full studies done every three to five years and financial updates done each year in between the full study.
What are the National Reserve Study Standards of Practice? There are two major organizations that have developed reserve study standards: Community Association Institute (CAI), whose standards can be found here Association of Professional Reserve Analysts (APRA), whose standards can be found here
What is the Physical Analysis? The Physical Analysis is where the Component List is determined. The Component List shows what components are included in the reserve study, along with each component’s useful life, remaining useful life, and cost estimate. The useful life is how many years a component is designed to last in total, and the remaining useful life is how many years are left before that component needs to be replaced.
What happens during the site inspection? The site inspection, sometimes referred to as the site visit or on-site analysis, is where most of the information regarding the Component List is obtained. Some components, however, may be excluded from the site inspection if they are not easily accessible. The site inspection is limited to a general visible assessment of condition. No testing or other intrusive investigations are performed. Therefore, it is imperative that the Board give feedback and information regarding the condition of components.
What is the Financial Analysis? Based on the information provided in the Component List, and mathematical equations, the Financial Analysis determines the proper amount the association should have in its reserve account each year for 30 years. This amount is known as the Fully Funded Balance (FFB) or the amount needed to be 100% funded.
Once the FFB is known, the Financial Analysis determines how much money should be contributed to reserves on an annual basis. This is known as the Reserve Contribution and is the most important information that a reserve study determines. The Reserve Contribution should be relatively stable and avoid special assessments if possible.
How much does a reserve study cost? The cost of the reserve study can depend on several factors, but primarily it is based on the Association itself. Some small single-family home communities with little common area elements can obtain a reserve study for as low as $500. While large master-planned developments or high-rise towers may need to pay well over $10,000. Most associations fall somewhere within this price range. Contact GeoReserves to request a bid.
Who can prepare a reserve study? Nevada is currently the only state requiring a specific permit to prepare reserve studies. Most reserve analysts have a background in finance or engineering. Byron Goetting, owner of GeoReserves, has prepared over 1,000 reserve studies in seven different states across the country for associations ranging from large to small.
