And, why is it useful? Read more to find out.
It is time. The Community Association Institute (CAI), or your state laws are saying that your reserve study needs to be updated. The Board asks that you solicit request for proposals (RFP’s) and present to them the best option. They receive the reserve study to comply with state laws or recommendations by professionals, but what do you do once you have it? Is it a budgeting and maintenance tool, or does it get filed in the drawer and forgotten?
What is a reserve study?
A reserve study is a budgeting and planning tool. It is created by a Reserve Specialist (RS) or a Reserve Analyst. A person with the RS has successfully passed examination from CAI indicating that they are experienced and specialized in creating and writing reserve studies. Often the RS will be employed by an engineering firm.
The reserve study helps the Board of Directors, Manager, and any Association Employees (Building Engineer, Maintenance, etc.) plan for maintenance and major repairs and replacements. The reserve study is instrumental in the creation of an operating budget as well as reserve budgeting.
The reserve study is a document owned by the Association. It is often requested by lenders (mortgage companies) when refinances of the units (homes) are occurring, and/or when a sale is transacted between one buyer and another. Lenders want to know that the Association has proper funding in the reserve before the loan is approved. Likewise, future buyers may request to see the reserve study for the same reason: a healthy reserve may indicate that a special assessment will not be needed in the near future.
How does an RS know what to include in the reserve study?
Every Association has a set of Governing Documents that indicates to the Association what is a common element. The Governing Documents charge the Board with the maintenance, repair, and replacement of the common elements. In a reserve study, the common elements are broken down by the RS into components. Each component is provided a useful remaining life (URL), and an anticipated cost for the major repair or replacement to occur at the time the URL expires.
Does the RS review the Governing Documents?
It will depend on what level of a reserve study is requested by the Manager and approved by the Board.
What Type of Reserve Studies are there?
There are a few different types of reserve studies, and each engineer firm may have a different name. An example of categories is listed below, and may vary depending on which firm is bidding on the project:
Level 1: This is a complete review from ground up. It is the most expensive level of a reserve study and depending on the size of the association may easily cost over $30,000. However, it does not take into consideration any assumptions. Physical inspection is conducted by the RS, measurements are taken from building plans or in person. Governing Documents are reviewed by the RS. The RS will interview the Manager, Board, Association employees, review Association Contracts, and even speak with Association hired Contractors. Funding plans are completed based on Baseline, Threshold, and Full-Funding.
Level 2: This is a more comprehensive report than a level 3, or a review, but is not as detailed as a Level 1. The RS will visit the Association to confirm components from the prior reserve study, as well as visually review components to update the useful life. Funding plans are completed based on Baseline, Threshold, and Full-Funding.
Level 3: The RS will not conduct a site visit or inspection. It is assumed that components listed in the prior reserve study are accurate and complete. Based upon normal wear and tear since the last study, the RUL will be updated with new funding plans provided.
Does the Reserve Study include EVERYTHING?
No. A reserve study will only include items that are common elements that qualify as reserve expenses, that have a useful life (UL), and a remaining useful life (RUL).
Items that may not be included in the reserve study because it is an exclusion. For example, many reserve studies DO NOT include a mechanical component review. This may be satisfactory for a small Homeowner’s Association of 25 units that does not have common area air conditioning or heating but is not acceptable for a large high-rise complex of 600+ units with a boiler, chiller, water heaters and other major mechanical items. When requesting proposals for the reserve study, the Manager should specify if they need a mechanical review as it will most likely be an additional expense. Some engineering firms have mechanical engineers, while others will recommend a specific firm or sub-contract this service if selected.
Items that have a useful life remaining of more than 30 years may be excluded from the reserve study, too. For example, a brand-new community, recently developed may not list roads, detention basins, retention basins, or culverts in their transition or initial reserve studies. The study should indicate it is not listed because of the RUL, but…will a manager 30 years from now remember this, and remind the RS to update the reserve study accordingly when the time occurs?
Reserve studies also often indicate that they only include items that they can see. So, what is excluded? In communities where the road is a common element, the condition of the road is not truly known without core samples and invasive testing, both of which is excluded from the base reserve study pricing.
In low-rise, mid-rise, and high-rise construction, they cannot see behind the walls (or the pipes within). For multi-story living, a pipe replacement for HVAC (heating, vents, and air conditioning) can easily cost millions of dollars that is not being reserved for or funded. While a pipe replacement may only be needed once every 50 years, a special assessment to cover the project can be costly.
Additionally, condition of the façade and balconies may not be known until core sampling and testing of the concrete occurs. Delamination, spalling of the concrete, and exposed rebar are signs that a community needs to act immediately. Sampling and testing of the concrete may assist a community BEFORE delamination and spalling occurs. Whether before or after it occurs, these samples will help engineers create specifications for repairs and replacement but are excluded from a reserve study.
How will the Reserve Study help me plan and budget accordingly?
The reserve study includes a list of components (common elements) in the community, their useful life (UL), remaining useful life (RUL), and estimated cost for replacement when their RUL expires. Often the reserve study will refer to ongoing maintenance and repairs by the Association’s Employees or Contractors. Proper maintenance and repair can extend the useful life of a component, which is one of many reasons it is important to regularly update reserve studies. It is not necessary to reserve at a higher rate then needed if useful life is being extended.
The reserve study will provide charts and graphs that can be utilized by the Board, Finance Committee, Manager, and Association Employees. These charts and graphs indicate how much money should be reserved on an annual basis, and indicate which items are due for major repair and replacement on an annual basis.
This information is helpful to explain to residents in the community as well, especially if maintenance fees are increasing due to reserve contributions or an upcoming reserve project. It is also helpful for the community to know what is occurring and when, so that they are well-informed about their home.
Summary:
A reserve study is an integral part of a Community Association. It is a budgeting and planning tool that helps the Board, Management, and Association Employees plan for the current and upcoming fiscal years. It also helps the community understand the timeline and cost of upcoming expenditures so that they can plan accordingly. A reserve study is an integral part of every Community Association and should be strongly considered when developing any financial planning, budgets, or maintenance plans.
But a reserve study may have exclusions which will require the Manager and Board to conduct further research so that any exclusions and unknowns can be revealed, fully evaluated, and planned for accordingly.
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