All community associations need a long-range planning. A Reserve Study identifies association maintained components, their useful lives, the cost of repair or replacement and a 30 year funding plan. Reserve Studies also ensures that all owners pay a fair share, that money is there when needed, and that special assessments are only for capital improvements. Please contact us for more information on how we can help you community plan for the future.
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 capital 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. Reserves can often grow upwards of tens or hundreds of thousands of dollars. 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. 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:
- A special assessment (lump sum cash contribution from owners)
- A phase-in period of several years where fees increase each year
- 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. Special assessments are typically unpopular and have a tendency 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.
How much does a reserve study cost?
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.