What is a Reserve Study?
As defined in Wikipedia ... A reserve study is a long-term capital
budget planning tool which identifies the current status of the reserve fund and a stable and equitable funding plan to offset ongoing
deterioration, resulting in sufficient funds when those anticipated major common area expenditures actually occur.
Purpose of a Reserve Study
The purpose of a reserve study is to give those overseeing the maintenance of the property a better idea of what major expenses to expect and
an educated estimate of when these expenses will occur. With this knowledge, the homeowners' association board or manager can create a budget so
association members will make their fair share of reserve contributions, designed to offset the slow but steady ongoing reserve component
deterioration of the association assets, and avoid being surprised by components that deteriorated often in plain sight and over a number of
A reserve study is a roadmap that allows decisions to be made which will be efficient and effective for the long term. The
International Capital Budgeting Institute (ICBI) has established standards for calculating percent funded. There are three methods of making
this calculation, and differences between reserve practitioners can, unfortunately, result in significant differences in the percent funded
amount. The ICBI recommends that percent funded calculations should always be made using the inflation adjusted method. Click
here to view/download the ICBI's Reserve Study
There are three results from a reserve study:
- A listing of the major components of the association to be funded through reserves, their expected useful life, remaining useful life,
and current replacement cost (yielding the "scope and schedule" of the reserve projects).
- An evaluation of the current strength of the reserve fund (commonly expressed as "percent funded").
- A recommended multi-year reserve funding plan.
Why you should have a reserve study.
There are six important reasons to conduct a reserve study.
- Establish understanding of the community's financial status to fund the ongoing maintenance of depreciable components.
- Fulfill the Board of Directors fiduciary responsibility.
- Assists the community in creating the annual budget.
- Helps maintain home values.
- Helps mitigation for special assessments and/or deferred maintenance.
- Comply with regulatory requirements and the association's bylaws.
Four Phases: Plan ... Do ... Communicate
Phase 1: Plan
Develop the work plan, gather the participants performing the work, identify the work products and who is going to
them and the operating budget.
Phase 2: Do
Perform the physical analysis and the funding, or financial, analysis. The physical
assessment can often be the most time consuming, especially the first time through. In subsequent reviews, the component list generally
remains static and it is only necessary to perform an update. Subject matter experts should be used when assessing physical asset costs
Without tools, conducting the conducting the financial analysis requires knowledge of capital planning ... or the use of a tool
such as the Reserve Funding Analyzer to assist in this effort.
- Identify components
- Specify quantities
- Inspect components
- Determine component useful life
- Assess remaining life and determine replacement year
- Determine replacement cost
Guidelines and reference material are available to assist with this effort. Many published by government agencies and
professional organizations. Visit the Knowledge Base page for a list.
- Determine funding goal
- Identify current balance of reserve and operations accounts
- Estimate current and future income
- Project operational expenditures and future reserve fund needs
- Prepare statement of limitations and assumptions
The best available tool for performing the financial analysis is the Reserve Funding Analyzer (RFA) ... available
for purchase here.
Phase 3: Communicate
Communicate the results for disclosure and implementation. Create a report and distribute it to all stakeholders. The Reserve
Funding Analyzer will create the reserve study report using your data. Follow through with implementation.
Phase 4: Update
Routinely update the reserve study ... preferably annually.