Are Reserve Studies Important?
Of Course they Are!
Several states have laws requiring that Associations have reserve studies completed on a regular basis (usually once every five years). Reserve studies determine the necessity and amount of reserves required to repair, replace, and restore the capital components
What is a Capital Component? Those items, whether or not a part of the common elements, for which the Association has the obligation for repair, replacement or restoration. Roofs, pools, paving, siding, hvac are all examples of capital elements.
What is a Reserve Study?
- A complete and quantitative inventory of all common elements subject to repair or replacement
- An accurate listing of the useful lives of the common elements and, more importantly, their remaining useful lives.
- A determination of future replacement costs by element and by year
- Relatively stable reserve budget recommendations for each year of the next 25 years.
Some reserve consultants provide more insight by documenting the current condition of each element. The consultant can also analyze maintenance problems and use his/her expertise to provide engineering recommendations that will extend the lives of the common elements, thus reducing long-term costs.
The benefits of a reserve study performed by a professional reserve specialist are having:
- A master business plan for maintaining association property in excellent condition
- Accurate timing and costs of future capital projects
- Engineering advice in thorough, yet understandable language.
- Fulfillment of the board of directors’ fiduciary and other responsibilities
- Few claims of property mismanagement
- Spending less time in the budgeting process
- Recommendations that extend the lives of the property components
- Having a valuable marketing tool for prospective buyers and lenders
- If budget recommendations are followed, less chance of having to approve a special assessment or obtain loans, for major repairs.
After the Reserve Study is completed, then what?
Once the reserve study has been completed, it should be reviewed annually to determine if reserves are sufficient. Any shortfalls should be addressed in the current budget in order to maintain the proper level of reserves needed.
The annual review and update ensures accuracy and helps correct the level of funding based on changes in remaining useful lives of the common elements due to repairs, environmental conditions, rate of deterioration, preventive maintenance, technological advancements, and additions or deletions. It also helps set the correct level of funding by reflecting changes in inflation and interest rates, and the estimated future costs of replacing them.
The states studied the condition of condominiums and homeowners associations and found too many associations had inadequately planned for the maintenance and eventual repair of major common elements such as roofs, mechanical systems, roadways and recreational facilities. The recommendation for a complete reserve study every five years, with annual updates is designed to help assure condominiums and homeowners associations address the repair and replacement of their common area property, based on analysis and evaluation, by accumulating adequate funds and ensuring properties are kept in good condition.Share