Reserve Studies: What are They and Why are They Important?
Do you know the best way to plan for future expenses of your Association? How much longer will that retaining wall last? How much will it cost to resurface your community’s pool in 3 years? All of these topics are addressed in what is called a Reserve Study. Kevin R. Giles, RS. – Mr. Giles of Criterium-Giles Engineers has performed numerous reserve studies for a wide range of community associations throughout North Carolina, South Carolina and Virginia. Mr. Giles has also achieved the CAI designation of Reserve Specialist (RS). Criterium-Giles Engineers works with hundreds of associations each year on reserve studies, transition studies, construction administration and other engineering consulting projects.
Q: What is a Reserve Study?
A: A community association typically has two broad cash requirements including the annual budgeted items (landscaping contracts, insurance, utilities, management, etc.) and non-annual, capital repair expenses (roof replacement, asphalt paving resurfacing, pool resurfacing, etc.). A community association will typically establish a separate capital reserve account to fund the non-annual, capital repair expenses. A reserve study is a tool that helps the association plan for the future capital repair needs. The reserve study is presented in a report format with narrative sections and graphs/tables. The reserve study will include estimated costs and frequencies of capital repairs over a 20 year term. This would be limited to non-annual, capital repair expenses for which the association would be responsible. The reserve study will also include a cash flow analysis with reserve funding recommendations. One of the primary purposes of a reserve study is to guide the association on how much they should budget for reserve account contributions. The general process of the reserve study includes a site inspection of association maintained assets, a review of governing documents, a review of association financials, a review of historical information about previous capital projects, the preparation of a draft reserve study report, a review of the report with the board of directors/manager, and finally, a finalized reserve study report.
Q: Why are they important?
A: The reserve study is an important tool to help the association plan for future capital repair expenses. The reserve study will help the association know how much money to save in the reserve account each year. A properly funded reserve account will help prevent special assessments, loans and prevent the need to defer capital repairs. The reserve study will also include an independent assessment of the condition of the association maintained assets in the community. The study will provide estimated timelines and costs for major capital repairs to assist the board
Q: When should a community get one?
A: The earlier the better. The more time there is to save for future capital repair needs, the easier it will be. We have done reserve studies for communities during the initial construction phase, prior to transition. This allows the association more time to save for the larger capital repairs like roof replacement and asphalt resurfacing. We have also worked with 60 year old properties that have never had a reserve study completed, we helped them prioritize repair needs and plan for the future repairs.
Q: Are updates important to a Reserve Study for a community that already has one? Why?
A: The reserve study updates are important to provide an updated inspection of the condition of the assets in the community. Some components may deteriorate more or less rapidly than originally estimated based on weather conditions, usage and other factors. An update will revise remaining useful life estimates based on the condition of the components at the site inspection. A reserve study update will also include updated cost estimates. The cost of repairs of various components will most likely vary from the average inflation utilized in the original reserve study. Updating every 5 years will allow those costs to be reflected in the new recommended funding levels.
Q: How often should they be updated?
A: We typically recommend a reserve study update with site inspection every 5 years or so. However, it would be wise to update a reserve study after any significant event that may affect the reserve account or the capital repair needs. These events may include replacing roofs or other assets as a result of an insurance claim, selling a portion of association owned property or revising bylaws/declarations including association maintenance responsibilities. It would also be prudent to update a reserve study several years in advance of a major capital repair project (roof replacement, asphalt resurfacing, etc..). This would allow time to modify reserve contributions if needed in advance of the repair.