What is a reserve study?
A reserve study outlines a stable, equitable, and proactive Annual Funding Plan to offset your community’s long- term and often costly expenditures.
A study made of all the major capital systems in the association, it evaluates how much life they have left and how much they’re likely to cost when they wear out. From that, you can calculate how much money the association has to set aside each year to have enough to replace those items when they do wear out.
How to Start Prepping
Most states, including California, require associations to conduct reserve studies. These studies can be time consuming and costly, so making sure you properly prepare everything needed is a key to conducting a successful and accurate reserve study. Three areas to start your planning are:
1. Creating a Component List: The reserve study should contain every single component the association has, and it should be as detailed as it can possibly get. This can include roofs that will soon need replaced, surfaces that need to be painted, roads that need to be resurfaced, communities’ updates, etc. Be sure to come up with the most accurate estimates possible for each component.
2. Calculating a Reserve Fund Strength: Reserve fund strength is a calculation comparing an association’s Actual Reserve Balance to its Fully Funded Balance. To get this, take the estimated replacement cost and divide it by the number of years the item is estimated to last. That number is the amount you should reserve each year. Then compare the amount needed to be reserved with what is actually being reserved and see if what is being reserved is accurate or if adjustments need to be made.
3. Creating a Funding Plan: Create a custom funding plan detailing annual reserve contribution, avoiding special assessments when possible. Creating this plan will help stay on track and reduce the potential of running into unforeseen costs. Be sure to check your G/L to make sure you have coded your payments to correct accounts so you won’t have to redo it when it comes time to do your budget.
Creating a reserve study can become more complex the deeper you dive into it. Having an expert assist you is a great option to relieve some of the stress and time that comes with putting a reserve study together. Atlantic and Pacific Management can help you asses your assets and components and create your reserve study. For more information, or anything else HOA related, reach out to Atlantic and Pacific Management.