A Reserve Study is a budget planning tool, used by Condominium and Homeowner Associations to create an effective funding plan for anticipated common area expenditures over a period of time (normally 30 years). The Reserve Study consists of two parts, a physical analysis and a financial analysis.
The physical analysis initially entails a site inspection which is a limited visual inspection of the association’s common area components. The Study generally does not include invasive or destructive testing. The purpose of the physical analysis is to identify common area components, evaluate their condition, determine useful life, remaining useful life, and estimate the major repair or replacement cost.
The financial analysis establishes an appropriate annual reserve contribution rate.
In recent years many states, including California, Oregon, Hawaii, Utah, Virginia and Washington, have introduced laws which mandate the requirement for condominium and homeowner associations to have reserve studies prepared on a regular cycle (1 to 6 years). Other states such as Montana and North Dakota have no specific legislation in place. However, even when there is no legal requirement it is still prudent to have a reserve study prepared on a regular basis.
For information on specific state requirements we recommend that you review our LAW page.
Timing requirements for reserve studies differ with varying state legislation, but every association that has common area components should have a reserve study prepared on a periodic basis. We believe that the reserve study should be used to assist a board in making budgetary decisions for the coming financial years. This means that the reserve study should be prepared a couple of months in advance of the board meeting (timing will vary depending on the association’s fiscal year).
Reserve studies are usually prepared by people trained and certified in the field. One such certification, Reserve Specialist (RS), is available through the Community Associations Institute (CAI). To obtain this certification, candidates must have prepared at least 30 reserve studies within the past 3 calendar years, hold a bachelors degree in construction management, architecture, or engineering (or something equivalent based on experience and education), and comply with industry standards and code of conducts.
Another credential is the Professional Reserve Analyst (PRA), created and promoted by the Association of Professional Reserve Analysts (APRA).
The cost of a reserve study is dependent on the complexity, size and location of an association and is basically a function of the time taken to prepare the report. Reserve study options and associated pricing can be provided on request within 1-2 business days.
A reserve study will typically be completed to a final draft stage within four weeks of a signed contract.
The process starts with the request for a proposal. Proposals can be obtained by filling in the request form on this website or alternatively by calling one of our Reserve Specialists in the office toll free at (888) 315-2843.
Determining an appropriate level of funding is subjective as each association will have a particular view of what is acceptable for their own particular circumstances.
In the context of funding levels the term “percent funded” is often used. This is a measure of current reserves compared with accumulated depreciation of common area components. It refers to the level of an association’s actual reserves compared with the fully funded balance, expressed as a percentage. The percent funded level can also be used to define an acceptable level of reserve funding and to set goals for associations to improve the level of their reserves.
The reserve study funding plan is used to determine the contribution rates required to provide sufficient funds for the estimated future major repair and replacement costs of common area components
Factors that need to be considered are:
- current reserve funding,
- the projected annual funding required,
- the acceptable level of increase in the level of funding, and
- inflation and interest factors.
These items are all taken into consideration and discussed with association management when preparing the reserve study.
Determination of what constitutes a reserve component is dependent on a number of factors. Unless explicitly determined otherwise, a four-part test is used to distinguish a reserve expense from that of an operational or maintenance expense.
A reserve component will generally satisfy the following criteria:
- The component is part of the Association’s common or limited common area responsibilities.
- The component has a predictable useful service life.
- The component’s useful life fits within the projection period (normally 30 years).
- The component’s cost for repair and replacement is too high to be included as part of the operating or maintenance budgets.