The objective of a Reserve Study is to set the minimum level of annual reserve contributions made by a community association.
This generally ensures that adequate funds exist for the replacement or major repaid of any component of the property as it becomes necessary. Depending on the Board of Directors’ wishes, a study can be either extremely exhaustive or restricted to only the major building components. In either case, each item included must be evaluated to determine the current condition, the remaining useful life, and the replacement cost. Then, this information is synthesized into a spreadsheet format which determines the contribution needed. All costs and balances are shown both in constant dollars and adjusted for annual inflation and interest earned (rate assumptions are clearly shown). Ideally, an even level of contribution is established that maintains a positive balance in the account.
In order to build a study that is of the greatest value to the Association, Asset Guardians employ a “Reasonable Approach” when evaluating a property. This means that we attempt to predict (based on the economics and the association’s objectives) what a reasonable person will decide to have done when the corrective action becomes necessary. For example, if a reasonable person does not have an entirely new fence installed when repairing or restoring the old one would produce the same result. The benefit of this would be those reserve contributions are minimized to allow for what is most likely to occur. Our studies are not based on a worst-case scenario. It should be noted that our approach assumes that the Association will correct minor problems as they occur – before they become major problems.
The benefits of a consistent annual contribution to Reserves as determined by a Reserve Study are many:
- IT IS FAIR – Owners contribute only to the useful life extracted during their term of ownership. Therefore, current owners are not assessed for what previous owners did not pay.
- PROTECTS THE OWNER’S INVESTMENT – By ensuring that funds always exist to keep a community maintained and functional, each owner’s investment in their unit is protected.
- INCREASES SALABILITY/LEND ABILITY – Savvy purchasers and lenders closely examine association finances before making commitments. A good reserve study and adequate reserves illustrate an Association’s financial health and endurance.
- REDUCES SPECIAL ASSESSMENTS – By utilizing a reserve study to aid in medium and long-range planning, the need for special assessments is greatly reduced. This assists personal financial planning and reduces the uncertainty and fear of ownership.
- IDENTIFIES PROBLEM AREAS – By highlighting items that need immediate attention or routine maintenance, useful lives are extended, and costs are minimized. An ounce of prevention is worth a pound of cure.
To provide the best reserve analysis possible, many sources are used in compiling our report. These include:
- Site visit and inspection of facilities
- Conference with on-site management and maintenance personnel
- Review of building blueprints
- Generally accepted construction, maintenance, and repair guidelines
- Conversations with vendors employed by the Association