What is a reserve study, and does your community need it?

What is a reserve study?

Before understanding a reserve study, it’s essential you are familiar with the terminology behind reserve funds.

• A reserve fund is a community savings account that serves as a cushion — protecting your association’s finances from the burden of necessary future expenditures. By design, a reserve account grows over time through regular funding from a percentage of your association’s dues.
   
• A reserve study assists with an association’s long-term financial planning by considering the status of the reserve fund and determining a regular funding contribution that will offset ongoing wear and tear and achieve future community enhancements. It is comprised of two parts — a comprehensive physical analysis of the current condition of your community’s assets and a detailed financial analysis.

Both are critical components of the budgeting process that help ensure the long-term financial security of your community.
 

What is included in reserve studies?

A reserve study assesses two components: a physical and financial analysis.

• A physical analysis includes an examination of the community’s condition, specifically within their physical assets, including how their roofs, pools, and amenities look and perform. This assessment is also helpful for determining the expected lifespan of the property’s physical components and the cost of replacements, if any are needed.
   
• A financial analysis covers and evaluates the community’s current reserve fund balance and provides forecasts for future reserve needs. This portion of the study helps professionals recommend the appropriate amount associations should contribute to the reserve fund to cover these expenses.

Are HOA reserves required?

Your governing documents will detail if a reserve fund must be established for your community. Some states require fully funded reserves. Those documents will also outline what procedures must be followed to contribute to your reserves and if funding can be postponed or sidestepped if most of your residents agree.
 

When do you perform reserve studies?

The recommended frequency of reserve studies often depends on your location, as states have differing laws and recommendations to help guide this decision. For example, Although Florida law (Section 718.112(2)(f) of the Florida Statutes and Rule 61B-22.005 of the Florida Administrative Code) mandates that associations must fully fund reserve accounts unless a vote to waive reserves is obtained, it does not stipulate a precise schedule for reserve studies. Meanwhile, the state of California requires associations to conduct a reserve study every three years under the Civil Code Section 5550.

With regulations often changing, some states may require more frequent studies than others. It can also depend on the type of residence, as master-planned communities might have different complexities than those of high-rises, for instance.
 

How much do reserve studies cost?

The cost of reserve studies varies depending on the type of community, size, assets, scope of the study, and the company you hire. Typically, there are different types of studies that companies offer. One includes a site inspection, measurement, and quantification of components within the reserve. You could also have a reserve study with a site inspection but no additional services. Lastly, studies without site inspections are also a standard service companies offer. While prices vary depending on the study level, you can expect prices between $250 and $10,000. These types of payments can also be either a one-time fee or periodic costs.

While the cost may seem significant, it is a valuable investment that helps manage future expenses effectively and can prevent larger, unplanned costs in the long run.
 

Reserve studies and special assessments

Special assessments are implemented through your HOA and define a specific sum that property owners in an HOA community pay for upgrades and repairs. They are typically one-time fees, and they help handle unforeseen expenses that arise within the community.

One of the main advantages of establishing and maintaining HOA reserves is that it warrants all residents using and enjoying community assets contribute to their costs. Without reserves, a special assessment may be needed, where only those residents living in your community would be impacted when an asset needs to be replaced.

By funding reserves over time, you can provide for future generations of owners to share in the costs of assets.
 

Determining maintenance vs. reserve components

Properly categorizing your community’s common area components is one of the challenges of managing reserves. Some items will require regular maintenance, such as pressure washing sidewalks and window cleaning; others will need to be replaced, like roofs and mechanical equipment, and still others will require both, such as pools and carpeting. You must budget for yearly maintenance costs to ensure your community components will last until they are due to be replaced. If you don’t, you may have to replace them before the reserve study’s replacement due date, impose a special assessment, or take out a loan. At the same time, you must make a reserve contribution each year to be prepared to cover replacement costs when scheduled.

Deciding whether items are maintenance vs. replacement (or both) will ultimately determine if they will be listed in your annual operating budget or as part of your reserve inventory. Usually, less expensive items are included in the operating budget, and costlier items are assigned as reserve components so their replacement costs can be financed over a longer period.
 

Does your association need a reserve study?

Yes, your association should consider reserve studies. Not only are recent events highlighting this need, but legislative changes are also supporting the assessment of reserve studies.

In our study of 15 high-rise markets in the U.S. and Canada, we found that similar factors are driving budget increases across different regions, specifically for high-rises. Our BENCHMARK: High-rise report highlights the top factors driving budgets for high-rises to be:

1. Reserve studies and funding
    
2. Retaining top talent
    
3. Insurance
    
4. Utilities
    
5. Environmental sustainability

With reserve studies and funding placed as one of the main priorities of these properties, our study underscores the importance of reserve studies and how high-rise communities contribute to them. The importance of reserve studies could also be applied to other types of communities, as the need for adequate reserves with other operational costs can help the long-term sustainability and value of properties.

One of the most notable tragic incidents is the collapse of Champlain Towers South in Surfside, Florida; after this tragedy, we are seeing a significant increase in the funding of reserves across most markets. Also driven by legislative changes in certain states, we are seeing heightened awareness and more proactive approaches from the boards to fund their reserves.

Recently, the Community Associations Institute (CAI) has endorsed the requirement for reserve studies to facilitate funding for new developments and ensure periodic reserves for communities with significant shared components. While not all states have adopted this legislation yet, the following have already implemented such requirements:

• Florida
   
• Connecticut
   
• Georgia
   
• Hawaii
   
• Illinois
   
• Maryland
   
• Michigan
   
• Virginia

Updating reserve studies regularly, preferably every three to five years, enables boards to make informed decisions that align financial strategies with regulatory requirements, community expectations, and fiduciary duties. Always consult with a qualified attorney to ensure any financial planning adheres to your association’s specific legal obligations.
 

BENCHMARK: High-rise

If you want to learn more about budgeting strategies surrounding reserve studies in high-rises, we invite you to download our BENCHMARK: High-rise guide.

With data compiled from communities in our managed portfolio of 3,800 high-rise buildings across major urban areas across North America, BENCHMARK helps community association boards, developers, property managers, and owners of high-rise properties make informed decisions about their operations and budget strategies.

Download the report for insights tailored for reserve study budgets in your high-rise community!

To learn how FirstService Residential can support your community's vision, contact a member of our team.