Financial Best Practice: Conduct a Reserve Study

Karen Danzinger - Friday, February 1, 2019

A reserve study is an essential tool in long term planning for the Association. It gives the Board the information it needs to create a funding plan for the maintenance and repair of major capital components, such as replacing the roof, redoing the pool marcite, or repaving the roads. While most board members are aware of the big three (painting, paving and roof), and some are aware that ANY item costing over $10,000 to repair or replace must be included in the reserves, most still don’t consider all the other components that, whether over or under the $10k line, are aging and deteriorating and will be needing replacement in the future. Just doing a current year budget isn’t enough – you need to look into the future at what’s coming if you want a strong, financially stable association.

What is a reserve study?

The reserve study is an in-depth report generated by experts, usually architects or engineers, that reviews all capital assets of the association, and details the status of each asset. The report generally indicates all items that need periodic replacement, what the remaining expected life is, and the cost of the replacement. It usually also gives a full funding plan for ensuring the association has the funds needed when the components life expires.

Why is the study needed?

Unless you have an engineer on your board, most associations simply don’t have the expertise in house to conduct such a comprehensive study. The main benefit of a study, in my opinion, is to establish sound financial planning for the reserve components. With proper planning, which requires good information, associations are less likely to require special assessments, which is a win-win for owners and boards. The goal of the study, after all, is to predict what will need to be replaced when, and to have the cash reserves available at that time for that expenditure. A great side effect of having proper reserves is that they help maintain the property’s value and appearance. If the funds are there, the assets are more likely to be maintained and well-kept, adding to the association’s overall quality (and therefore value). A last consideration for board members: you have a fiduciary responsibility to your members. You, as a board member, are legally bound to use sound judgement in the management of the association. Ignoring major capital expenditures is definitely not being financially responsible and deferring them until cash is available can often lead to far more expensive repairs, as well as a more run-down appearance. (Think old peeling paint!)