A reserve study is a budget-planning tool, arranged by a homeowners association, which is designed to explore the capacity of member contributions to pay for the maintenance of elements that are shared among association members.
Reserve studies consist of two distinct analyses, which proceed in the following order:
Physical Analysis: During this on-site inspection, a commercial inspector, typically following the International Standards of Practice for Inspecting Commercial Properties, will identify needed repairs. The inspector will also attempt to anticipate future improvements that will be needed. The inspector will list the shared components and detail their useful life and the cost required to repair or replace them. Some typical “shared components” are exteriors, sidewalks, community rec rooms, parking lots, tennis courts, public hallways, lobbies, gates, signs, outdoor lighting, and roofs. Some projects such as tree trimming or painting may be excluded as routine operational maintenance.
Financial Analysis: The funds available to a property are compared with the amount needed to cover both currently and eventually required repairs. This comparison is represented as a percentage, called “percent funded,” and is used to ascribe a grade to the property. For instance, a property that is 80% funded is more prepared for future repair costs than a property that is only 45% funded. Often, this analysis includes strategies to maintain or increase the percent funded.
Why are reserve studies helpful?
They fulfill the obligations of the board of directors. Reserve studies are tools that help guarantee that board members can fulfill their legal obligation to maintain the properties for the homeowners’ association members.
Laws in some states require reserve studies. Many states now require community associations to disclose reserves, accumulate reserves, or have professional reserve studies conducted. It's anticipated that more states will adopt similar legislation. Currently, 20 states require that reserve studies be performed.
They help enhance the property's appearance and value. A reserve study helps to maintain the community's overall appearance by making sure it is preserved and attractive.
They can help prepare community associations for unforeseen disasters. Disasters can be manmade, such as when a truck crashes through the front gate, or they can be natural, such as earthquakes, floods or heavy winds. Although it is impossible to accurately predict when these events will happen, a good reserve study will assess the history of the building and the surrounding area to come up with reasonable life expectancies for shared elements so that there are sufficient funds to replace them during emergencies.