According to the Foundation for Community Association Research, around 75.5 million people in the United States live in a homeowners’ association (HOA) community, which is more than 30% of the U.S. housing stock. Reserve studies refers to a vital capital planning tool for Homeowners Associations and condominium associations that provides directional guidance and an in-depth analysis of community assets. The report contains two parts: a physical analysis and a financial analysis. Understanding what reserve studies are, how they operate, and the role they should play in an association’s budget is no longer something that only experienced or senior community managers need to know; it is knowledge that all community managers must have in order to effectively lead an association. This article will guide you towards success, providing everything you need to know about reserve studies.
Why They Matter
Reserve studies help property managers and HOA boards understand the big picture as it relates to property maintenance and financials. The upkeep of common elements like pools, sidewalks, lobbies or fitness centers, is often driven by the reserve study recommendations.
The board of directors is responsible for protecting, maintaining, and enhancing the assets of the community association they serve. To do this, associations must develop multi-year plans that help them understand their long-term budget needs and, at the same time, anticipate and responsibly prepare for the timely repair and replacement of common area components such as roofs, roads, mechanical equipment, and other portions of the community’s common elements.
2 Key Components of a Reserve Study
Generally, a reserve study includes two important parts:
- The physical analysis portion of a reserve study includes a component inventory of all items the association is responsible for repairing, replacing, restoring, or maintaining. It also includes estimates of repair and/or replacement costs.
- The financial analysis portion of the reserve study identifies the status of the association’s reserve fund and presents an equitable funding plan to offset ongoing deterioration by ensuring sufficient funds will be available to offset anticipated major common area expenditures as they occur. Complete financial health – revenue, expenses and reserve fund balance are all under the microscope.
Contents of a Reserve Study
According to the Community Associations Institute (CAI), every reserve study should include at least seven items to ensure your community gets the directional guidance it needs for prioritizing capital projects and to maintain financial stability. Your reserve study should be a detailed report that utilizes tables, graphs, diagrams, spreadsheets and explanatory graphics. These items are important pieces of a reserve study and should not be considered as extras, as they will make the results easier to understand.
The seven components recommended by the CAI in all reserve studies are:
- A summary of the association’s number of units, physical description and reserve fund financial condition.
- A projection of reserve starting balance, recommended reserve contributions, projected reserve expenses, and projected ending reserve fund balance for a minimum of 20 years.
- A tabular listing of the component inventory, component quantity or identifying descriptions, useful life, remaining useful life and current replacement cost.
- A description of methods and objectives utilized in computing the Fund Status and development of the Funding Plan.
- Source(s) utilized to obtain component repair or replacement cost estimates.
- A description of the level of service by which the reserve study was prepared.
- Fiscal year for which the reserve study is prepared.
Conclusion
Reserve studies are an invaluable resource that provides directional guidance for boards as they make decisions that support both the near and long-term health of their communities. Community associations that update their reserve studies more frequently benefit from a decreased need for special assessments. HOA boards and property managers also get an accurate picture of their association’s finances, which allows an association to accurately plan for major expenditures down the road.
While they may seem complicated, a reserve study can save your association time and money in the future. HOA management companies are highly skilled and understand the requirements for reserve studies. By consulting with these experts, you and your community will be better prepared for future financial matters.
