Frequently Asked Questions
Why is it important to perform a Reserve Study?
A Reserve Study provides the essential information needed to guide the Board of Directors in their budgetary decisions for their community. In addition to assisting the Board of Directors in determining the correct amount of money to go into the Reserve Fund, the Reserve Study also serves as a guide for obtaining and evaluating proposals in advance of pending projects.
The Reserve Study will also be a valuable tool when working with real estate agents, brokerage firms and lending institutions for potential homeowners, as it is often requested to reveal the strength of the Reserve Fund prior to purchasing a condominium or townhouse. A well-documented and strongly funded Reserve Fund increases property values and marketability.
By hiring a third party professional to prepare the Reserve Study you avoid bias and can be assured that an accurate component list and fund calculation has been determined.
Are Reserve Studies required by law?
The government requires reserve studies in approximately 30 states. These laws are intended to protect homeowners from having to pay special assessment costs. Even if it is not currently required by your state, it is likely that the documents of the association require that a reserve fund be established. This does not mean a Reserve Study is required, however it is difficult to know if there are enough funds in the reserve account if you don’t have the information provided by a professional Reserve Study.
How often do we update or review the Reserve Study?
Unfortunately, there is a misconception that these reports are good for an extended period of time since the report has projections for the next 30 years. Just like any major line item in the budget, the Reserve Study should be reviewed each year before the budget is established. Invariably, some assumptions have to be made during the compilation of this analysis. Anticipated events may not materialize and unpredictable circumstances may occur.
What makes an asset a “Reserve Component” item versus an “Operating Component” item?
A “Reserve Component” is an item that is the responsibility of the association to maintain, has a limited useful life, predictable useful life expectancy, typically occurs on a timeline that exceeds 1 year and costs above a minimum threshold cost.
An “Operating Component” expense is typically expenses that occur on an annual or monthly basis or are below the minimum threshold cost for the Reserve Component list.
What are the GREY area of “maintenance” items that are often seen in a Reserve Study?
One of the most popular questions revolves around major “maintenance” items, such as painting the buildings or seal coating the asphalt. Some accountants say reserve components such as painting walls or seal coating asphalt cannot be considered a reserve issue because replacement of a “capital” item is not in occurrence. However, it is the opinion of several major Reserve Study providers that these items are considered to be major expenses that occur on a cyclical basis. Therefore, it makes it very difficult to ignore a major expense that meets the criteria to be considered a reserve component. Once explained in this context, many accountants tend to agree and will include any expenses, such as these examples, as a reserve component.
What happens in a site visit?
The property inspection is conducted following a review of the documents that established and identify all common area assets. Estimated life expectancies and life cycles of common area components are based on conditions that are readily accessible and visible at the time of the inspection. The property inspection will not include any type of intrusive or destructive investigation. Where additional information is required, it may be obtained by contacting the contractor or vendor that installed or maintained the component in question.
What is the Financial Analysis?
The starting balance for the reserve fund analysis can be calculated by adding any expected reserve contributions and subtracting any pending projects for the rest of the year. This number is compared to the ideal reserve balance to calculate the percent funded level. The percent that an association’s reserve is funded measures how strong the reserve fund is at that point in time.
Measurements of percent funded strength:
0% - 30% Funded – Is considered to be a “weak” financial position. Associations that fall into this category are subject to special assessments and deferred maintenance. This situation could lead to lower property values. If the association is in this position, actions should be taken to improve the financial strength of the reserve fund.
31% - 69% Funded – Majority of associations are considered to be in this “fair” financial position. While this doesn’t represent financial strength and stability, the likelihood of special assessments and deferred maintenance is diminished. Effort should be taken to continue strengthening the financial position of the reserve fund.
70% - 99% Funded – This indicates a financial strength of the reserve fund and every attempt to maintain this level should be a goal of the association.