Reserve Studies: Everything Board Members Should Know
Reserve Study 101
The financial health of your community, including your property values and the lifestyle of your residents, all hinges on creating a budget that works for your association. With that, reserve studies are just as critical in helping the board avoid financial emergencies. So how do reserve studies fit into the overall budget for your association? It’s simple. Financial planning for the longevity of your community up front translates to fewer costs in the future.
As a board member, having a clear understanding of what reserve studies are and how they impact the community you serve is crucial. Let’s walk through the ins and outs of what they are, why they are essential and how often to complete them.
What is a reserve study?
A reserve study is an in-depth analysis and inspection of an association’s assets. The study identifies the value of each asset, evaluates its condition and projects a timeline and cost for repair or replacement. Ultimately, the association is left with a financial roadmap, unique to the community, that aims to adequately fund assets identified by the governing documents as the association's responsibility.
There are three different types of reserve studies.
LEVEL 1: Full reserve study. This detailed, labor-intensive study includes a physical and financial analysis.
LEVEL 2: This report updates Level I, including a visual onsite (physical) inspection and financial analysis.
LEVEL 3: This updates the financial analysis only - with no visual inspection - and verifies that the existing funding plan is accurate.
Who conducts a reserve study?
The complexity of your property, the type of study you need and your criteria as a board will help determine which company or specialist to choose. FirstService Residential can help identify and interview candidates and review sample reserve studies from other communities. Remember that relationships are important, and partnering with someone who works well with your board will be essential.
How often should a reserve study be conducted?
The answer depends on several factors; however, any of the following topics demonstrate when it is time to update a reserve study (or conduct a new one):
TIME-BASED: With a thorough Level I study in place, it is good practice to update it at least every other year. If your association has any outstanding loans, there may also be lending requirements that stipulate how frequently to update the study.
MAJOR REPAIR: Any time there is a significant repair, you’ll want to update the reserve study to reflect it.
ADDING ASSETS: If your community adds any new assets, such as a playground or pool, the current reserve study needs to be updated.
ISSUE/EVENT: If a weather-related or water-related event impacts and changes the useful life of an asset, you’ll want to update your reserve study.
How much do reserve studies cost?
Regarding reserve studies, the size of your community and the level of analysis you need can impact the overall cost. However, it’s important to remember that cost should not be a deterrent to completing a reserve study.
Why is it important?
Every asset has a useful life and will eventually need repair or replacement. A reserve study is essential because it enables proper funding of your reserves to accommodate those repairs and replacements. Without adequate funding, your association could have to charge a special assessment to all owners or access funds through a loan. The alternative to a properly funded reserve account will always be more costly.
Three types of funding for reserves:
BASELINE FUNDING: The reserve study tells you how much the association should spend each year, which is the amount you request.
FULLY FUNDED: This is funding where each year, the total amount to be fully funded is divided by the remaining useful life of the assets. For example, if an asset has a lifespan of 20 years, then each year, you would fund 5% (1/20th) of the replacement cost for that asset.
THRESHOLD FUNDING: This funding identifies a “sweet spot” where your association will always have all the money it needs to cover projects, repairs and replacements without keeping any extra money tied up in the account.
Want to know more?
Preparing your association’s annual budget is a valuable opportunity to ensure the financial well-being of both your association and homeowners. As Texas’s property management leader, FirstService Residential has the experience and expertise to help you make the best decisions for your community’s success.
Contact us now for more information about all the ways FirstService Residential Texas can provide your board with the resources and solutions it needs.