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Reserve Studies
Community Association Reserve Study
All community associations need long-range planning. The Reserve Study identifies association maintained components, their useful lives, the cost of
repair or replacement and a 30 year funding plan. The Reserve Study ensures that all owners pay a fair share, that money is there when needed and special assessments are for capital improvements.
Reserve Study Q & A
What is a reserve study and how can it help a homeowner association better manage its funds and maintenance?
 The reserve study analyzes major repair and replacement needs like recreation amenities, roofing or deck replacement and provides a funding plan for accumulating money to perform this work when its needed. There are several parts to the reserve study: First, all major association maintained components are identified. Next, the cost to renovate each item is then determined by contractor bid or construction cost estimate. Then, the remaining useful life of each item is noted.
For example, if roof replacement costs $100,000 and the remaining useful life is 25 years, then $4,000 is required yearly to pay for the work when it's needed. Doing this procedure for each component will show the total money needed yearly to fund reserves. Each year, the reserve fund needs to be adjusted by inflation and by the interest earned on the invested funds. Every three years the components are examined for replacement life and current contractor's bids are obtained.
How should these reserve funds be accounted for?
Reserve funds should be kept in a different account from the normal operating funds. It's conceivable that reserves will grow to tens or hundreds of thousands of dollars. Prudent investing of these funds will reduce the amount of money needed from owners. Since the reserve study shows when money will be needed, long term investment can be purchased that will return more than savings accounts. Conservative investments like government securities or certificates of deposit (CDs) are recommended.
When should a reserve study be performed?
All homeowner associations, regardless of size, should have a reserve study done. Once completed and the funding plan is in place, yearly updates are relatively simple and inexpensive. If the association has inadequate reserve funds to begin with, the reserve study will show the need for "catch up." To replenish the fund, several options are available: 1) a special assessment (lump sum cash contribution from owners) or 2) a phase-in period of several years where fees increase each year, or 3) a combination of both. Whatever course of action taken, the goal should be to reach "100% Funding" which means the association is accumulating money on schedule to meet future major maintenance needs.
What sorts of financial problems can homeowner associations encounter with inadequate reserve funds?
Without adequate reserves, associations rely on special assessments. Since special assessments are unpopular, the tendency is to postpone major renovations. This deferral accelerates the deterioration process, detracts from curb appeal and erodes home resale values. A reserve funding plan with regular monthly contributions from each owner is both fair and insures that major maintenance is done when it's needed.
Can poorly managed reserve funds affect the sale of units?
Absolutely. Buyers and lenders look closely at how reserve funds are handled by the association. Lack of reserves is a red flag for an inevitable special assessment. If given the choice between an association with healthy reserves or one with little or none, which would be the wiser investment?
Which types of major repairs must be paid for by association funds?
The association documents define what repairs are the associations responsibility. In common wall communities like condominiums, the association is usually responsible for items like roofing, landscaping, siding, painting, paving, sidewalks, pools, clubhouses, signage and fencing. But there are many more.
What kind of qualifications should a reserve study analyst have?
Besides experience doing reserve studies and a list of client references, the reserve study analyst should have good budgeting skills, knowledge of construction and an understanding of homeowner association operations.
How much does a reserve study cost?
If the association has a volunteer experienced in construction cost estimating, nothing. However, there are many advantages to having a knowledgeable consultant do this work. Expertise, knowledge of local contractors, current costs and objectivity are only a few of them. Costs to perform a reserve study vary based on the size of the community, the number of components and the time needed to measure them.
WMC, Inc. Contact Information
- Telephone
- (530) 583-2713
- FAX
- (530) 583-2336
- Address
- P.O. Box 6955, 243 N. Lake Blvd., Suite #202, Tahoe City, CA 96145
(Located above Plumas Bank and next door to the Balcony Hair Salon)
URL: http://www.wmc-inc.com/reservesturdies.htm
Last modified: November 04, 2007
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E-Mail: WMC, Inc.
