Call Toll Free 1-866-574-5115

RESERVE STUDIES VERSUS REPLACEMENT PLANS - WHAT'S THE DIFFERENCE



Reserve Studies and Replacement Plans are similar long term budgeting tools. The main difference is the statutory requirements in many States for reserve studies which are done for common interest communities such as condominiums, HOA, and cooperatives versus capital replacement plans which are done more for businesses, private clubs, worship facilities, schools, camps, etc.


Reserve Studies and Replacement Plans are similar long term budgeting tools. The main difference is the statutory requirements in many States for reserve studies which are done for common interest communities such as condominiums, HOA, and cooperatives versus capital replacement plans which are done more for businesses, private clubs, worship facilities, schools, camps, etc.


Reserve Studies

In WA State there are specific RCW requirements for what’s to be included in reserve studies (RCW 64.34.382 Reserve Study-Contents​) and legal requirements for what common areas are to be considered and specifically included or commented on in a reserve study. These laws were enacted to protect the common interest community’s membership in WA State after a number of years when many Associations enacted significant assessments and saw litigation from a lack of fiscal responsibility to its membership. The Reserve Study Contents section of the RCW requirements can be seen below:


RCW 64.34.382


Reserve study—Contents.

(1) A reserve study as described in RCW 64.34.380 is supplemental to the association's operating and maintenance budget. In preparing a reserve study, the association shall estimate the anticipated major maintenance, repair, and replacement costs, whose infrequent and significant nature make them impractical to be included in an annual budget.


(2) A reserve study must include:

(a) A reserve component list, including roofing, painting, paving, decks, siding, plumbing, windows, and any other reserve component that would cost more than one percent of the annual budget for major maintenance, repair, or replacement. If one of these reserve components is not included in the reserve study, the study should provide commentary explaining the basis for its exclusion. The study must also include quantities and estimates for the useful life of each reserve component, remaining useful life of each reserve component, and current repair and replacement cost for each component;

(b) The date of the study and a statement that the study meets the requirements of this section;

(c) The following level of reserve study performed:

(i) Level I: Full reserve study funding analysis and plan;

(ii) Level II: Update with visual site inspection; or

(iii) Level III: Update with no visual site inspection;

(d) The association's reserve account balance;

(e) The percentage of the fully funded balance that the reserve account is funded;

(f) Special assessments already implemented or planned;

(g) Interest and inflation assumptions;

(h) Current reserve account contribution rate;

(i) A recommended reserve account contribution rate, a contribution rate for a full funding plan to achieve one hundred percent fully funded reserves by the end of the thirty-year study period, a baseline funding plan to maintain the reserve balance above zero throughout the thirty-year study period without special assessments, and a contribution rate recommended by a reserve study professional;

(j) A projected reserve account balance for thirty years and a funding plan to pay for projected costs from those reserves without reliance on future unplanned special assessments; and

(k) A statement on whether the reserve study was prepared with the assistance of a reserve study professional.


(3) A reserve study shall include the following disclosure:

"This reserve study should be reviewed carefully. It may not include all common and limited common element components that will require major maintenance, repair, or replacement in future years, and may not include regular contributions to a reserve account for the cost of such maintenance, repair, or replacement. The failure to include a component in a reserve study, or to provide contributions to a reserve account for a component, may, under some circumstances, require you to pay on demand as a special assessment your share of common expenses for the cost of major maintenance, repair, or replacement of a reserve component."

[2011 c 189 § 4; 2008 c 115 § 2.]


Reserve Studies are completed to National Reserve Study Standards published by the Community Association Institute as well as within APRA best practices guidelines. These are industry standards that ensure reserve study professionals across the United States have similar terminology, definitions and methodologies to ensure common interest communities are receiving similar reports regardless of the company completing them.


Additionally in a reserve study we will review the reserve allocation rate and reserve accounts of an Association to determine the current financial health and future expected financial health over time by utilizing our “Percent Funded” calculations. This Percent Funded calculation is a good barometer of the risks associated with an Association’s current reserve allocation rates with respects to assessments, loans and litigation over time.


Replacement Plans

Replacement plans can include just about anything that is visible and can be quantified. Typically we will complete a replacement plan for a museum, business, worship facility or school and include all the typical building & site components seen in a reserve study but will go further to include many business related expenses such as lifts, furniture, artwork, computers, etc. that add up to a significant expense over time but individually may be smaller expense items.


Additionally we will not typically review a Clients account balances for a Replacement Plan but will include a “Percent Funded” analysis if a specific account has been created and shared with us for review. Our Replacement Plans provide long term suggestions regarding the necessary amount that needs to be set aside now to pay for future expenses related to these components.


Capital Plans are slightly more Client catered as they are not bound by statutory requirements. At the onset of the Replacement Plan we will interview the Client for specific goals regarding the long term budgeting for the organization, what components are to be included or excluded and what risks levels the organization has regarding these expenses over time (helps us develop an appropriate financial strategy).


Both Reserve Studies and Replacement Plans​ are excellent long term budgeting tools that our Clients utilize and depend on for their long term budgeting needs. Additionally both these studies can and often are utilized for bid verification with vendors (e.g. roof replacement, exterior paint, window replacement), as a lending requirement by Banks, marketing purposes and as a management tool (timeline of expenses and list of components).

 


Written by Joel L Tax - Professional Reserve Analyst - 05/13/2016