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A reserve study is a detailed report that assists common interest developments (CID) in planning for long-term common area repair and replacement expenses. A CID exists when there is individual ownership of a house or condominium along with the shared ownership or right of use to common areas. These common areas can include streets, roofs, recreational facilities and many other items. A reserve study includes two parts: 1) The Physical Analysis contains information about the condition and repair/replacement cost of the components that the CID maintains. The physical analysis should include a component inventory and quantities, estimated useful and remaining lives, and estimated replacement costs. 2) The Financial Analysis evaluates the CID’s reserve fund balance and income. The financial analysis calculates a CID’s percent funded by comparing the actual reserve balance to a fully funded balance. The reserve study then estimates the total annual contribution necessary to defray the future costs.
A reserve study is a detailed inventory of all of the components that a CID will need to repair or replace. It also lists what will need to be done to maintain these components, when this maintenance will need to be done, and what the cost will be. In addition, a reserve study calculates the required monthly contribution for each owner so that the needed funds will be available to perform the repairs and replacements. It also calculates how much a CID should currently have in its reserve account.
Certain states, such as California, require that reserve studies be completed and that the board of directors inform owners of the reserve status annually. In addition, the board of directors of a CID has a legal and fiduciary duty to maintain the community in a good state of repair. Property Values are directly affected by the level of maintenance and upkeep of the common area components. Reserve studies create a maintenance plan, which keeps a development in good condition, therefore increasing property appreciation and value. The amount of funds in the reserve account also greatly affects property values. Reserve studies inform CID’s how much they should have in their reserve account, which eliminates costly special assessments. Over time each member of a CID should contribute their fair share to the reserve account so when expenses arise the required funds are available. Reserve Studies can also help avoid litigation against CID board members and property managers.
A 50-unit homeowners association maintains the roof of their building that currently costs $100,000 to replace. It’s estimated useful remaining life is 12 years. When you include inflation, the cost to replace the roof in 12 years will be approximately $140,000. The association’s reserve study tells them they need to save about $20 per unit per month over the life of the roof to have enough money to replace it in 12 years. If they save this amount each month over the roofs 12 year life, when it comes time to replace the roof there will be $140,000 in the bank and every homeowner who lived in the association and made use of the roof will have contributed. If they did not have the reserve study done and had not been saving money they would need to special assess each owner $2,800 to replace the roof during the 12th year or take out a loan that would cost $2,800 per unit plus interest. This is unfair to an owner who did not live at the property for the entire life of the roof. An owner who moved in one year ago now has to pay $2,800 to replace a roof that was used for the past 12 years by someone who no longer lives at the property. A reserve study tells you exactly how much each owner should contribute each month so the costs are spread out over the life of the components. Most associations maintain many very expensive components so having a reserve study done is imperative.
The most accurate cost source is actual bids from contractors or to look at contracts from the last time the repair/replacement was last performed. In most cases bids or contracts are not available so unit costs for similar work done in the same local area are used. In addition, it is helpful to talk to local vendors who have knowledge of the work and can help with a cost estimate. A third source is to use construction cost estimators such as RS Means. Many times the entire quantity of a component will not need to be replaced or repaired all at once. An example of this is not all light fixtures on a property will need to be replaced at the same time. In this instance an allowance can be developed for the component.