An Introduction to Reserve Studies
What is a Reserve Study?
The Reserve Study Format
Conclusions

HOA Services Group is a leading provider of reserve studies for community associations and developers in the Western United States. Our studies meet all statutory requirements in the state of Oregon for condominium conversion projects and are consistent with generally accepted  industry standards for reserve study content and format.

If you are a homeowner, board member or developer and would like to know more about our work and reserve studies in general, please take the time to browse our site. 

If you would like more information about the services our company provides please contact our office for more information or to discuss the specific needs of your organization. [Return]

Introduction to Reserve Studies

A conversation about reserve studies usually begins with a question like “what is a reserve study and why do we need one?” Admittedly, this is not an easy question to answer and the explanation is not likely to fall under the category of entertaining reading.

For anyone who owns property located with a common interest development (CID) a reserve study is a crucial tool for managing the community owned assets within that development. In such circumstances the reserve study establishes a schedule by which funding for the maintenance, repair and replacement of major common area components are achieved.

This funding schedule provides assurance to property owners within the CID that funding to maintain the property will be available when needed. Community members are assured that their investment in the community will be enhanced over time through an equitable and systematic approach to accumulating the replacement reserves.

For those responsible for the governance and management of CID’s the well prepared reserve study is an invaluable management tool; providing community Boards and managers with the information they need to better engage in long range planning and advance scheduling of major component repair or replacement.

Perhaps most importantly, the reserve study provides accountability in the form of a written record.

As an integrated, long range management tool utilized by a changing group of community members, volunteer boards and management personnel, the reserve study serves as an historical record. For current decision-makers the reserve study helps to document the accountability of past managers and association boards with regard to the stewardship of association assets or reserves.

As dues paying members of a CID, individual property owners should demand that their association maintain a current reserve study. A comprehensive and credible reserve study is the only way to be assured that the association dues paid by community members are the result of an equitable reserve funding program. [Return]

What is a Reserve Study?

The generally accepted definition of a reserve study is;

The art and science of anticipating and preparing for major common area repair and replacement costs.

The sentence above is the commonly accepted one sentence definition of a reserve study. As a practical matter however, it leaves many questions unanswered with respect to what actually constitutes a reserve study.

For a typical reserve study prepared for a homeowners association (HOA), a more detailed explanation might sound something like this;

A reserve study is a technical and financial analysis of the community-owned assets within a common interest development. The study should include the following elements in a clear, easily understood format:

• Component inventory (for all common area assets within the community that have an expected useful life of 30 years or less)
• Remaining useful life estimate (used to establish a replacement schedule for all common area components)
• A current replacement cost estimate for each component included in the replacement reserve schedule. (The replacement cost estimates are adjusted for inflation to arrive at the projected future replacement costs for all components)  
• An analysis of the association’s current financial condition.(The results of this analysis are taken into account when developing the funding projections contained in the study)
• A funding model summary that includes a statement of which funding model is utilized in the study and the financial parameters that were used to arrive at the funding projections
• Funding recommendations including a 30 year projection of the annual reserve contribution required to provide adequate reserve funds for the replacement of common area components included in the study
• Appropriate disclosures and a statement of whether the project undertaken was a complete reserve study or an update of a previous study
• Component details that include an estimate of quantities and replacement costs as well as a detailed description of each component included in the study

The study may or may not include a physical inspection of the common area components and (except in cases governed by statute or an association’s governing document), any such physical inspection may or may not be performed by a qualified building technology expert. The qualifications of any individual performing such a physical analysis should be clearly stated within the reserve study narrative.

The ability to accurately analyze the various components and develop credible remaining useful life and replacement cost estimates requires a comprehensive understanding of the building technology used in the design and development of the project.

In most cases it is not possible to properly evaluate the condition and remaining life of components without performing a physical inspection of the property.

Maintenance and repair histories of major components and building systems may be evaluated to establish the level of preventive maintenance that has been performed during the service life of the component in question.

Individuals who perform such inspections and analysis should have a thorough understanding of facilities design, construction and building technology. Individuals with a background in architecture, engineering or construction management are ideally suited to the reserve study field. [Return]

The Reserve Study Format

Many reserve studies, including those prepared by HOA Services Group, are produced using proprietary software that generates the printed report. Such software will have varying capabilities with respect to customizing the layout and format of individual reports.

The real strength in these programs is in the “number crunching” capabilities they provide, which simplifies the math calculations required to produce the financial projections. However, the old adage about “garbage in, garbage out” is just as true with  reserve study software as it is with any other sort of computer program.

Regardless of whether a study is produced with a reserve study program or not, there are certain elements and critical pieces of information that should be included in every reserve study.

Both the American Institute of certified Public Accountants (AICPA) and the Community Associations Institute (CAI) have published guidelines which dictate minimum requirements for what constitutes a thorough reserve study.

One of the most important aspects of a useful study and one that is often ignored is the need for the reserve study to be formatted and written in such a way that it is easy to read and understand.

The format should be logical in its sequencing so that the report can be read without constantly having to flip around from one section to another. Many times people who read a reserve study are not familiar with them and often they have never read one before. Therefore it is beneficial to display the information and narrate the study in as simple a format as possible.

In order for the study to be most useful it needs to be presented in such a way that the reader can capture the key elements and find the most important information without becoming frustrated and losing interest in the subject.

A well formatted reserve study should contain all of the following elements displayed in a logical sequence:

• Title Page
• Table of Contents
• Executive Summary
• Component Inventory
• Appropriate Disclosures
• Definition of Key Terms used in the Study
• Summary Page that lists parameters used in the financial calculations
• Annual Expenditure Tables
• Components Listed by Category
• Component Detail Pages describing each component included in the reserve study in detail

Within each of these sections certain information should appear in order for the reserve study to meet the various standards established by the AICPA and CAI; Although it should be remembered that neither of these organizations represents any sort of law-making body and their guidelines are only recommendations.

Very few states have taken the initiative to mandate any sort of conformity with respect to reserve study planning. As a result, statutory governance of the profession varies widely from one state to the next. Formatting, report content, preparation techniques and professional expertise can vary widely from one provider to the next.  [Return]

Conclusion

While there is no requirement that a reserve study follow the format outlined in this article; what is important is that the essential information contained in the study be displayed in a logical sequence and that certain specific details are included in every report.

While there are reserve study guidelines that have been established by organizations such as the Community Associations Institute and the American Institute of Certified Public Accountants, the actual process of preparing a reserve study remains a very individualistic discipline as it is practiced today.

Even though two-thirds of all states have some sort of laws concerning reserve studies, with the notable exception of California, states do not generally require all community associations to prepare and maintain a reserve study.

Reserve study professionals are subjected to minimal, if any, oversight at the Federal, State or local level. Anyone seeking to retain the services of a reserve study provider should carefully review the qualifications of the individuals and firms who offer these services. [Return]