What are Reserve Studies?

  • Planning tools designed to anticipate, and prepare for, a property’s major repair and replacement projects.
  • Establish the current status of the reserve fund and generate a stable and equitable funding plan to offset the ongoing depreciation of the assets, determining the level of funds necessary when replacements are anticipated to occur.
  • Consist of two parts: the physical analysis and the financial analysis.
  • The physical analysis includes identification, quantification and evaluation of the major common area components.
  • The financial analysis incorporates the financial aspects, including the cash balances, accumulated depreciation, and future expenditures, to create a sound funding plan.
  • Typically prepared by a certified independent Reserve Analyst for the benefit of administrators (Board of Directors and/or professional management) of a property with multiple owners, such as a Homeowners’ Association (HOA).
  • Also utilized by resorts, apartment buildings, worship facilities, private schools, private clubs, retail complexes and office parks.

Reserve Study Purpose and Use?

  • Reserve Studies serve two purposes: financial disclosure and property management.
    • Financial disclosure refers to legally mandated (in several states, including California) documents that must be provided annually to association members, and by extension prospective purchasers, regarding the condition of common area components, the sufficiency of the reserve fund, and a funding plan detailing anticipated expenditures and the corresponding funding needs over a 30-year timeline.
    • Property management involves the anticipation of major component replacements with respect to obtaining proposals, planning for their implementation, and ensuring that adequate funding is available.

Who Should Have A Reserve Study?

  • Any business or association needing to maintain financial stability and preserve the physical aspects of their property.

What to look for in selecting a Reserve Study provider?

  • Reserve Studies are critical planning tools, so it’s important to work with a provider that fits your needs. Suggested questions for prospective companies:
    • How many Reserve Studies has the firm conducted in the last year?
    • How many Reserve Studies has the firm conducted in the last five years?
    • Professional organizations the firm and/or its principals belong to that enhance their qualifications? Certifications obtained? Membership in the Community Associations Institute (CAI)?  Reserve Specialist (RS)? the Association of Professional Reserve Analysts (APRA)?  Professional Reserve Analyst (PRA)?
    • Can they provide current certificates of insurance for General Liability Insurance? Professional Liability Insurance (Errors & Omissions)? Workers Compensation Insurance?
    • Can they provide additional coverage insurance certificates for management companies and/or community boards?
    • Will the report be compliant with CAI and APRA and Standards of Practice (SOP)? Will reports with site visits include photographic documentation of the components?
    • What is the background of the individual inspecting the property? Will others in the firm be involved? Does the firm have a strong quality control system in place? Will the principals of the firm be involved in the analysis and review of the report?
    • Will the reports note sources of replacement costs of each of the common elements, as required by professional guidelines – i.e. national cost guides, manufacturers publications, contractor estimates, internal database information, engineering evaluations, actual expenditures, etc.?
    • What percentage of the firm’s work is performing Reserve Studies? Does the firm specialize in Reserve Studies or is it an engineering, accounting, or contracting firm performing Reserve Studies as a sideline business?
    • Can they provide local references?
    • Can they provide sample reports?

RSI Reserve Study

  • Key information provided in an RSI Reserve Study:
    • A listing of the major components to be funded through reserves, their expected useful lives, remaining useful lives, and the estimated replacement costs.
    • A photo or graphic representation and evaluation of each of the major components (with site-visit reports).
    • An evaluation of the current strength of the reserve fund, expressed as percent funded.
    • A reserve funding plan indicating the recommended contribution rate for each year of the 30-year projection.
    • Multiple funding illustrations, to enable comparison with other funding options.

What is Percent (%) Funded?

  • A measurement (percentage) of the funds available (cash balance) against the accumulated depreciation of all the components in the study. It is a tool to assess the adequacy of the reserve fund and is a requirement of the National Reserve Study Standards as well as many states’ statutes.
    • % Funded = actual Reserve Fund Balance divided by the Fully Funded Balance (computed)
    • The Fully Funded Balance (FFB) is the sum of the current replacement cost of each component multiplied by its fraction of life “used up” and summing them all together.
    • 100% Funded (i.e., ideal) represents when the actual Reserve Fund Balance is equal to the Fully Funded Balance. It does not represent replacement of all the components in the study at a given point in time, unless all the components are fully depreciated (very rare).

What are Special Assessments and why should they be avoided?

  • They are levied upon the members of an Association when the required “regular assessments” are insufficient.
    • In addition to regular assessments – can be lump sums or collected in multiple payments.
    • Amounts determined by applicable law, governing documents, community members and/or leadership.
    • Up to certain limits, they may be imposed without a vote of the membership.
  • May be due to unforeseen circumstances, such as an uninsured loss, but more often they are necessary as a result of previous inadequate financial planning (i.e., failing to set aside sufficient funds in advance for predictable reserve expenditures).
  • Unfairly penalize current owners for underfunding by previous owners, and create financial hardship for individual members, which can ultimately impact the finances of the HOA as a whole.

How Much Does A Reserve Study Cost?

  • Fee structure is based on the types and quantities of the components to be evaluated. They reflect hours involved as well as various levels of expertise, and are typically higher:
    • When roofing, exterior finishes and fixtures are to be included.
    • For a property with 20 buildings versus a property with 5 buildings, due to the infrastructure and supporting elements, such as irrigation equipment, landscape/hardscape components, signage and postal boxes.
    • When interiors and amenities are to be included, i.e.: flooring, painting, light fixtures, restrooms, lobby furnishings, pools, parks, etc.
    • When there are multiple components, i.e.: lobbies, restrooms, parks, etc.
  • There are no square footage, unit, buildings, or other similar standards available to be utilized in determining fee structure.
  • Request for Proposal Form details, or previous Reserve Studies, are critical to determine appropriate fees. Subsequent to completion of the Reserve Study, fees for future Reserve Study Updates would be significantly less due to the initial creation of an accurate component inventory.

What is needed to get started?

  • Various executed documents, including a few that are mandatory, and others that that can enhance the study if available.
    • Reserve Study agreement (mandatory) (link here)
    • 50% deposit (mandatory)
    • Financial Information Sheet (mandatory) (link here)
    • Copies of the governing documents and/or a maintenance matrix (if available)
    • Site maps or plat maps (if available)
    • Previous major expenditures (if available)
    • Site-visit, if being performed, contact information (mandatory). Scheduling available weekdays with starting times from 7 am to 3 pm to allow for completion during daylight hours.

What are the timelines to complete a Reserve Study?

  • The Reserve Study process can take anywhere from 2 to 8 weeks+, depending on the type of study and complexity of the development.
    • Reserve Studies requiring a site inspection typically entail approximately 4-6 weeks from the date of the inspection (5-7 weeks if larger / more complex), including the mandatory documentation (Reserve Study Agreement, deposit, and Financial Information Sheet).
    • Reserve Studies without site inspections typically entail 2-4 weeks from receipt of the mandatory documentation (3-5 weeks if larger / more complex).
    • Site visits can usually be arranged within 1 week of receipt of the mandatory documentation between January through June. Between July and December, the time frame can be 2 weeks or longer.  Specific delivery dates can be requested, and we will endeavor to meet them.
    • Accelerated delivery of any type of study can be provided and depending on the time of year the accelerated fees will range from 20% to 50% of the total quoted fee for the standard engagement.

National Reserve Study Standards – Terminology and Definitions:

  • Levels of Service
    • “Full” Reserve Study: creation of the Reserve Study, involving generation of the component list, measuring/quantifying all reserve components, and development of the Useful Life, Remaining Useful Life, and Current Replacement Cost based on a diligent, visual on-site inspection. Note that for most associations, a “Full” Reserve Study only needs to be done once. After a “Full” Reserve Study has been done, in subsequent years the association can choose between the two Reserve Study Update options shown below:
    • “Update With-Site-Visit” Reserve Study: an update of an existing Reserve Study involving a diligent visual on-site inspection but presuming that all components have been properly identified and quantified. This type of update is often performed every two to five years.
    • “Update No-Site-Visit” Reserve Study: an update of an existing Reserve Study without a site inspection, done by client interviews and interviews with knowledgeable vendors and service providers.  This type of update is typically performed in the years in-between With-Site-Visit updates.
  • Terminology and Definitions
    • ACCUMULATED DEPRECIATION:  The amount in dollar value of the current depreciation of a selected set of assets which has accumulated over the duration of their existence.
    • CAPITAL IMPROVEMENTS:  Additions to the association’s common elements that previously did not exist. While these components should be added to the Reserve Study for future replacement, the cost of initial construction should not be taken from the reserve fund.
    • CASH FLOW:  A method of developing a reserve funding plan where contributions to the reserve fund are designed to offset the variable expenditures from the reserve fund. Different reserve funding plans are tested against the anticipated schedule of reserve expenses until the desired funding goal is achieved.
    • COMPONENT:  The individual line items in the Reserve Study developed or updated in the physical analysis. These elements form the building blocks for the Reserve Study. These components comprise the common elements of the community and typically are: 1. association responsibility, 2. with limited useful life expectancies, 3. predictable remaining useful life expectancies, and 4. above a minimum threshold cost. It should be noted that in certain jurisdictions there may be statutory requirements for including components or groups of components in the Reserve Study.
    • COMPONENT INVENTORY:  The task of selecting and quantifying reserve components. This task can be accomplished through on-site visual observations, review of association design and organizational documents, review of association precedents, and discussion with appropriate representative(s) of the association.
    • CONDITION ASSESSMENT:  The task of evaluating the current condition of the component based on observed or reported characteristics.
    • EFFECTIVE AGE:  The difference between useful life and remaining useful life. Not always equivalent to chronological age since some components age irregularly. Used primarily in computations.
    • FINANCIAL ANALYSIS:  The portion of a Reserve Study where the current status of the reserves (measured as cash or percent funded) and a recommended reserve contribution rate (funding plan) are derived, and the projected reserve income and expenditures over a period of time are presented. The financial analysis is one of the two parts of a Reserve Study.
    • FULLY FUNDED:  100 percent funded. When the actual (or projected) reserve balance is equal to the fully funded balance.
    • FULLY FUNDED BALANCE (FFB):  An indicator against which the actual (or projected) reserve balance can be compared. The reserve balance that is in direct proportion to the fraction of life “used up” of the current repair or replacement cost. This number is calculated for each component, and then summed for an association total. FFB = Current Cost X Effective Age/Useful Life Example: For a component with a $10,000 current replacement cost, a 10-year useful life and effective age of 4 years the fully funded balance would be $4,000.
    • FUND STATUS:  The status of the reserve fund reported in terms of cash or percent funded.
    • FUNDING GOALS:  Independent of methodology used, the following represent the basic categories of funding plan goals. They are presented in order of greatest risk to least risk.  Risk includes, but is not limited to, cash problems, special assessments, and deferred maintenance.  Baseline Funding: Establishing a reserve funding goal of allowing the reserve cash balance to never be below zero during the cash flow projection. This is the funding goal with the greatest risk due to the variabilities encountered in the timing of component replacements and repair and replacement costs. Threshold Funding: Establishing a reserve funding goal of keeping the reserve balance above a specified dollar or percent funded amount. Depending on the threshold selected, this funding goal may be weaker or stronger than “Fully Funded” with respective higher risk or less risk of cash problems. Full Funding: Setting a reserve funding goal to attain and maintain reserves at or near 100 percent funded. This is the most conservative funding goal. It should be noted that in certain jurisdictions there may be statutory funding requirements that would dictate the minimum requirements for funding.
    • FUNDING PLAN:  An association’s plan to provide income to a reserve fund to offset anticipated expenditures from that fund. The plan must be a minimum of twenty (20) years.
    • FUNDING PRINCIPLES:  The reserve provider must provide a funding plan addressing these principles:  Sufficient funds when required, Stable contribution rate over the years, Equitable contribution rate over the years, Fiscally responsible.
    • LIFE AND VALUATION ESTIMATES:  The task of estimating useful life, remaining useful life, and current repair or replacement costs for the reserve components.
    • PERCENT FUNDED:  The ratio, at a particular point in time related to the fiscal year end, of the actual (or projected) reserve balance to the fully funded balance, expressed as a percentage. While percent funded is an indicator of an association’s reserve fund size, it should be viewed in the context of how it is changing due to the association’s reserve funding plan in light of the association’s risk tolerance.
    • PHYSICAL ANALYSIS:  The portion of the Reserve Study where the component inventory, condition assessment, and life and valuation estimate tasks are performed. This represents one of the two parts of the Reserve Study.
    • REMAINING USEFUL LIFE (RUL):  Also referred to as “remaining life” (RL). The estimated time, in years, that a reserve component can be expected to serve its intended function. Projects expected to occur in the initial year have zero remaining useful life.
    • REPLACEMENT COST:  The cost to replace, repair, or restore the component to its original functional condition during that particular year, including all related expenses (including but not limited to shipping, engineering and design, permits, installation, disposal, etc.).
    • RESERVE BALANCE:  Actual or projected funds, as of a particular point in time that the association has identified, to defray the future repair or replacement cost of those major components that the association is obligated to maintain or replace. Also known as reserves, reserve accounts, cash reserves. Based on information provided and not audited.
    • RESERVE PROVIDER:  An individual who prepares Reserve Studies. In many instances the reserve provider will possess a specialized designation such as the Reserve Specialist (RS) designation provided by Community Associations Institute (CAI). This designation indicates that the provider has shown the necessary skills to perform a Reserve Study that conforms to these standards.
    • RESERVE PROVIDER FIRM:  A company that prepares Reserve Studies as one of its primary business activities.
    • RESERVE STUDY:  A budget planning tool which identifies the components that the association is responsible to maintain or replace, the current status of the reserve fund, and a stable and equitable funding plan to offset the anticipated future major common area expenditures. The Reserve Study consists of two parts: the physical analysis and the financial analysis.
    • RESPONSIBLE CHARGE:  A Reserve Specialist (RS) in responsible charge of a Reserve Study shall render regular and effective supervision to those individuals performing services that directly and materially affect the quality and competence of services rendered by the Reserve Specialist. A Reserve Specialist shall maintain such records as are reasonably necessary to establish that the Reserve Specialist exercised regular and effective supervision of a Reserve Study of which he or she was in responsible charge. A Reserve Specialist engaged in any of the following acts or practices shall be deemed not to have rendered the regular and effective supervision required herein: 1. The regular and continuous absence from principal office premises from which professional services are rendered; except for performance of field work or presence in a field office maintained exclusively for a specific project; 2. The failure to personally inspect or review the work of subordinates where necessary and appropriate; 3. The rendering of a limited, cursory or perfunctory review of plans or projects in lieu of an appropriate detailed review; and 4. The failure to personally be available on a reasonable basis or with adequate advance notice for consultation and inspection where circumstances require personal availability.
    • SPECIAL ASSESSMENT:  A temporary assessment levied on the members of an association in addition to regular assessments. Note that special assessments are often regulated by governing documents or local statutes.
    • USEFUL LIFE (UL):  The estimated time, in years, that a reserve component can be expected to serve its intended function if properly constructed in its present application or installation.
  • Reserve Study Contents: a list of the minimum contents to be included in the Reserve Study
    • 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.
  • Disclosures: The following are the minimum disclosures to be included in the Reserve Study
    • General: Description of the other involvement(s) with the association, which could result in actual or perceived conflicts of interest.
    • Physical Analysis: Description of how thorough the on-site observations were performed: representative samplings vs, all common areas, destructive testing or not, field measurements vs. drawing take-offs, etc.
    • Financial Analysis: Description of assumptions utilized for interest and inflation, tax and other outside factors.
    • Personnel Credentials: State or organizational licenses or credentials carried by the individual responsible for Reserve Study preparation or oversight.
    • Update Reports: Disclosure of how the current work is reliant on the validity of prior Reserve Studies.
    • Completeness: Material issues which, if not disclosed, would cause a distortion of the association’s situation.
    • Reliance on Client Data: Information provided by the official representative of the association regarding financial, physical, quantity, or historical issues will be deemed reliable by the consultant and assembled for the association’s use, not for the purpose of performing an audit, quality/forensic analysis, or background checks of historical records.
    • Reserve Balance: The actual or projected total presented in the Reserve Study is based upon information provided and was not audited.
    • Component Quantities: For update with site visit and update no site visit levels of service, the client is considered to have deemed previously developed component quantities as accurate and reliable.
    • Reserve Projects: Information provided about reserve projects will be considered reliable. Any on-site inspection should not be considered a project audit or quality inspection.

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