What is a Reserve Study?
A reserve study is a budgeting tool which will include a list of common area component that are the HOA’s responsibility, a projected schedule for replacement/repair of these common area components and funding plans which guide the HOA on a path of fiscal responsibility so that the projects can be adequately paid for in a stable, fair and responsible manner.
There Are Three Levels of a Reserve Study
- Level I – Full study from scratch with no reliance on information from a past reserve study.
- Level II – Is an update to a Level I as a prior study is utilized for the component list and quantities but there is still a site visit to accurately update remaining useful life of the components – are they in line with the past reserve study?.
- Level III – Is an update to the Level I or Level II and includes updates to the useful life of the components, cost of the components and the financials of the Association – There is no site visit for a Level III which makes it the cheapest but also one which carries a higher level of possible inaccuracies.
Why Have a Reserve Study Completed?
- Helps Property Managers and Boards make informed decisions
- Fairness to the community members – current & future members
- Cost Savings – A reserve study can be utilized for planning and hiring of vendors in advance of the expected component failure. Informed Buyers with multiple bids will help to minimize expenses. Last minute shopping means fewer available vendors and typically at higher costs due to the urgency of not following a plan and delays in the project.
- Community market appeal and values are protected. When appropriate decisions and projects are completed before deferred maintenance which Buyers will view negatively.
- Liability is limited for all parties involved. The reserve study provider is an expert in their field and is able to provide information backed by experience, research and numerous resources such as cost manuals and Vendors interviews to make appropriate projects related to cost and useful life in the reserve study. Guesswork based on limited or no research carries significant liability to any Board Member or Property Manager who chooses to voice them during important budgeting meetings.
What Standards Are There?
- National Reserve Study Standards - Reserve studies are completed according to National Reserve Study Standards that were implemented in 1998 by the Community Associations Institute. The terminology, formulas and concepts are based on these standards that reserve study providers follow nationwide. This ensures there is a uniformity between reserve study providers that follow these standards and the results and recommendations will make sense to different Boards, different Providers and between different communities.
- Statutory Requirements - The State of Hawaii has various requirements which are outlined at this link Hawaii Reserve Study Law.
The Problems Association’s Face?
Common area reserve expenses are typically irregular and the large expenses are often infrequent. As can be seen in this Expenditure Graph there may be years of extremely high expenses while others years have minimal to no expenses projected. These fluctuating expenses are a budgeting headache as Board members need to determine appropriate reserve account allocation amounts from the relatively stable HOA dues and years in advance. How to do this fairly and accurately?
The Solution Reserve Study Companies Provide
This is where a reserve study is most beneficial to an Association. A component list is developed and funding plans are created to show how an Association can pay for these component expenses in a stable, fair and responsible way so that the HOA dues can remain stable and predictable for the community members.
While the component repair & replacement expenses fluctuate year to year the recommended reserve contribution rate will have a stable but slightly increasing trend. It takes into all the concepts and standards related to fairness and stability while meeting the projected expenses (note that the reserve contributions are not stagnant but increase at a stable rate of 3% per year to offset inflation).
The overall objectives of having adequately funds in the reserve account when needed while fairly distributing these expenses to the community membership over time is met. There will be minimal risk for special assessment, loans or deferred maintenance. [TOP]