A Reserve Study is a comprehensive analysis of the expected repair and replacement costs for the major common area components of a property or community over a long-term period, typically 30 years.

National Reserve Study Standards are a set of guidelines established by the Community Associations Institute (CAI) in 1998. These standards seek to:

1. Provide consistent terminology.

2. Standardize the levels of Reserve Study services.

3. Make a set of common disclosures within the Reserve Study.

4. Establish a Reserve Specialist (RS) credential program.

Any organization or community that owns a property with common areas or shared components, such as a homeowner association, condominium association, or commercial property owner, can benefit from a Reserve Study.

A Reserve Study helps property owners plan for the long-term maintenance and replacement needs of their common area components, so they can budget appropriately and avoid unexpected costs or deferred maintenance.

The governing documents of most association-governed communities require the Board of Directors to regularly allocate an “appropriate” amount of money to offset the ongoing deterioration of the common areas. However, physical assets deteriorate over time, and most of the “major” components of a property will require repair or replacement in a predictable manner, regardless of property type. A trustworthy and current Reserve Study enables advanced preparation for these inevitable expenses, distributing reserve contributions evenly over time, rather than relying on external funding sources such as special assessments, capital campaigns, or loans.

A Reserve Study typically includes an inventory of all common area components, an assessment of their condition and remaining useful life, an estimate of their repair and replacement costs, and a funding plan to ensure there are sufficient funds available to pay for future maintenance and replacement needs.

The physical analysis is a detailed examination of the major common area components, which includes listing each component, estimating its current cost, useful life, and remaining life, and conducting a field report or condition assessment (if necessary for Level 1 or Level 2 Reserve Studies).

The financial analysis comprises a funding study that relies on the information obtained in the physical analysis to determine reserve allocation, percent funded, and cash flow analysis.

Since a Reserve Study functions as a budget planning mechanism, most properties begin the process by requesting a Reserve Study proposal at least six months ahead of their fiscal year end. This gives the property’s management a month or two to choose a Reserve Specialist, a month or two to complete the Reserve Study, a month to review the finalized report, and enough time to incorporate the funding recommendations into the budget for the upcoming fiscal year.

The board should ensure statutory compliance and adjust for the unpredictable nature of reserve components by conducting a reserve study that includes an on-site inspection of accessible reserve items at least every three years, with licensed general contractors performing the inspection.

It is recommended that Reserve Studies are updated every three to five years, or more often if there are significant changes to the property or its components.

A Reserve Study should be performed by a qualified professional, such as a Reserve Specialist or Professional Reserve Analyst, who has expertise in the assessment of common area components and the development of long-term maintenance plans.

The Community Associations Institute created the Reserve Specialist (RS) certification to enhance the quality of Reserve Studies. To obtain the RS designation, applicants must undergo a these part review process that assesses.

1. Educational background (meeting minimum criteria)

2. Reserve Study experience (meeting a minimum requirement)

3. Sample work product (meeting minimum reporting requirements)

4. Client references (a minimum of 5)

The cost of a Reserve Study can vary depending on various factors such as the size and complexity of the property, the level of detail required, and the qualifications of the professional performing the study. However, the cost of a Reserve Study is typically a small fraction of the long-term maintenance and replacement costs that it helps property owners avoid.

A Reserve Study provides several benefits to property owners and community associations, including:

– A long-term maintenance plan that helps prevent unexpected repair and replacement costs.
– A funding plan that ensures sufficient funds are available to pay for future maintenance and replacement needs.
– A clear understanding of the condition and remaining useful life of common area components.
– Improved decision-making and transparency for property owners and community associations.
– Increased property values through well-maintained common areas and components.

A funding plan is a financial strategy that outlines how the property owner or community association will pay for future repair and replacement costs. The funding plan should take into account the projected costs of each component, the remaining useful life of each component, and the expected rate of return on investments.

A Reserve Fund balance that is considered sufficient for one property may not be enough for another. However, when a property’s actual reserves are compared to its calculated reserve requirements, a relative measurement scale known as “Percent Funded” is established. This measure of the relative reserve fund strength is now part of the National Reserve Study Standards and is independent of the funding method used (e.g., cash flow, straight line).

Percent (%) Funded = Reserve Fund Balance (actual) / Fully Funded Balance (computed)

The Fully Funded Balance (FFB) is calculated by multiplying the current replacement cost of each component by the fraction of its life that has been used up and adding them all together.

Percent Funded = 100% (i.e., optimal) when the Reserve Fund Balance (actual) is equal to the Fully Funded Balance (computed).

Common area components are the physical assets that are owned and maintained by a property owner or community association and are used by all owners or tenants. Examples of common area components include roofs, building facades, parking lots, swimming pools, elevators, and landscaping.

In full or level 1 Reserve study includes the following five tasks: First Create a list for components (inventory of components), condition evaluation based on visual on site inspection, creating funding plan, making funding status, and estimation of life and valuation.

In level 2 Reserve study (modify with on site visit) again the following five tasks: First Create a list for components (inventory of components), condition evaluation based on visual on site inspection, creating funding plan, making funding status, and estimation of life and valuation.

Note: The validity of previous Reserve Studies is essential for updates.

In level 3 Reserve study (modify with no site visit) the following three tasks will be done: Creating funding plan, making funding status, and estimation of life and valuation.

Note: The validity of previous Reserve Studies is essential for updates.

During a property inspection, which occurs after reviewing documents that establish and identify common area assets, the estimated life expectancies and life cycles of common area components are determined based on readily accessible and visible conditions, without any intrusive or destructive investigation. Contacting the component’s contractor or vendor can provide additional information if required.

Every Reserve Study, in accordance with the National Reserve Study Standards, provides three critical pieces of information that are valuable for both annual budget planning and disclosure purposes:

1. Component List (also known as what you are reserving for)

2. Percent Funded (also known as the Strength of the Reserve Fund)

3. Recommended Funding Plan