What is a Reserve Study?
In general terms a Reserve Study is a long term plan that indicates how much money needs to be set aside to pay for future expenses. Let’s say you live in a condominium, you share common assets such as roofs, siding, pools, cabanas, asphalt, parks, etc. These assets have maintenance and/or replacement expenses that can be reasonably anticipated with predictable costs. A Reserve Study evaluates each common area asset and informs you when expenses are anticipated, the cost of the expenses and how much money you should save or reserve to cover those expenses.
Reserve Studies contain a significant amount of information contained in two parts. One is the physical analysis. This analysis identifies which components are appropriate for reserve funding and the current physical condition assessment of each asset; then indicates the life expectancy or Useful Life (UL) of the component as well as the life remaining or Remaining Useful Life (RUL) of each component. The physical analysis is concluded with the current cost to replace each component. The physical analysis information is used within the financial analysis. Therefore, it generally contains many recommendations and justifications regarding component repair, maintenance and replacement recommendations as well as cost and life cycles.
The financial analysis includes two results. First it reveals the health of the Reserve Fund. This is completed by determining the current status of the Reserve Fund known as Percent Funded. The second result are reserve contribution recommendations. Using the information contained within the physical analysis, the future expected expenses are analyzed and reviewed. Then multi-year funding plans are developed to meet various funding goals. The reserve contributions required to meet the funding goal desired is then presented and recommended to the Association, which concludes the last result of the financial analysis.
The purpose of the Reserve Study is to provide useful information to evaluate the current circumstances and future needs. This information is important when determining what the physical and financial priorities should be. When Reserve Studies are properly used they help minimize deferred maintenance, special assessments or loans, and maximize property value.