Reserve Studies
A reserve study provides a current estimate of the costs of repairing and replacing major common area components (such as roofs or pavement) over the long term. Ideally, all major repair and replacement costs will be covered by funds set aside by the association as reserves, so that funds are there when needed.
This requires:
1) examination of the association’s repair and replacement obligations;
2) determination of costs and timing of replacement; and
3) determination of the availability of necessary (reserve) cash resources.
Because the board has a fiduciary duty to manage association funds and property, a replacement reserve budget is very important. Not only does this information supplement the annual pro forma operating budget in providing owners with financial information; the reserve study is also an important management information tool as the association strives to balance and optimize long-term property values and costs for the membership.
For buyers, understanding the reserve study is an important part of evaluating the value of a CID property. For association members, reserve planning helps assure property values by protecting against declining property values due to deferred maintenance and inability to keep up with the aging of components.
A good reserve study shows owners and potential buyers a more accurate and complete picture of the association’s financial strength and market value. The reserve study should disclose to buyers,lenders, and others the manner in which management of the association (i.e., the board and outsidemanagement, if any) is making provisions for non-annual maintenance requirements.
Preparing a reserve study calls for explicit association decisions on how to provide for long-term funding, and on the extent to which the association will set aside funds on a regular basis for non-annual maintenance requirements. A good reserve study may also function as a maintenance planning tool for the association.
There are two components of a reserve study – a physical analysis and a financial analysis.
The physical analysis, a reserve provider evaluates information regarding the physical condition and repair/replacement cost of an association’s major common area components. To do so, the provider conducts a component inventory, acondition assessment, and assigns life and valuation estimates.
During the financial analysis the preparer assesses the association’s reserve balance or current funding status to determine a recommendation for an appropriate reserve contribution rate in the future known as the future funding plan.
Reserve studies fit into one of three categories:
1. In a Full reserve study - the provider conducts a component inventory, a physical condition assessment and a life evaluation estimate to determine both a the current funding status and a future funding plan.
2. In an Update –with site inspection, the provider verifies the component inventory, a physical condition assessment on site, and life and valuation estimates to determine both the current funding status and future funding plan.
3. In an Update – without site inspection, the provider conducts life and valuation estimates to determine the current funding status and future funding plan.
For more information about reserve studies, to set a meeting to explain the benefits of reserve studies with your home owners association or a free proposal for conducting a study, please call 615-390-0564 or fill out the contact form below.
