By Will Simons, RS, EBP / Published January 2023
A reserve study is a planning tool used by a common interest real-estate development, such as a community association, to help prepare financially for large repair and replacement projects over a long period of time. Reserve studies allow the board and management of association-governed communities to offset the ongoing deterioration of the common area components with reserve funds to ensure their timely repair or replacement. Typical reserve components include pavement resurfacing, roof replacement, painting, mechanical system replacements, balcony/deck resurfacing, amenity area updates, and many more items. Reserve studies that are prepared in accordance with the National Reserve Study Standards include three key results: 1) a component list (detailing the timing and scope of each project), 2) a measure of the reserve fund strength (also known as percent funded), and 3) a recommended funding plan. A well-crafted reserve funding plan will ensure that irregular reserve expenses are offset by ongoing, regular reserve contributions, avoiding the need for special assessments, bank loans, or deferred maintenance.
The main objective of a reserve study is to minimize the risk of “surprise” expenses, deferred maintenance, special assessments, and (in the worst cases) a potential drop in property value. By looking at a long timeframe (typically 20–30 years or more), a reserve study will illuminate projects down the road that can easily be overlooked or minimized in the present day. The sooner an association can begin preparing, the less likely it is that the homeowners will be stuck with higher maintenance fees later on or, worse, special assessments. Associations with healthy reserve accounts can take care of projects when they become necessary, avoiding the problems associated with allowing components to deteriorate beyond repair. Well-maintained properties with adequate reserves in the bank are easier to manage and have higher owner morale. In this day and age, a reserve study documenting financial strength can also be an asset to associations looking to attract new buyers and maintain property values.
Reserve planning should definitely be an annual consideration, just like every other line item in the association’s budget. Adequate reserve contributions typically comprise 15–40 percent of an association’s budget—much too important to be ignored for years at a time. Professional firms typically offer multiple levels of service, including “with-site-visit” and “no-site-visit” updates, which should be done after the initial full study is conducted. The typical recommended interval for with-site-visit updates is every three years. No-site-visit updates are ideal for the off years, when a site inspection may be unnecessary. Waiting too long between updates could mean the association isn’t up to date on changing cost estimates and hasn’t accounted for projects that may have since been completed or are going to occur sooner than previously expected. Finally, reserve account balances and interest rates can change drastically from year to year. A reserve study should be thought of as a “living document” that will become more accurate and useful each year as new information is incorporated.
As with any other service, there are several important things to consider when choosing a provider. Look for a firm that is experienced, with credentialed staff members who are trained specifically for this type of work and who can demonstrate proficiency with similar clients. Asking for references and sample studies is a great way to help with the decision-making process. Be sure to research the company’s website and make note of any important qualifications. There are two credentials specific to professionals in the field: RS (Reserve Specialist), which is awarded by the Community Associations Institute, and PRA (Professional Reserve Analyst), awarded by the Association of Professional Reserve Analysts. These credentials are a clear indicator of experience and adherence to ethical and professional standards. You might also ask what kind of “extras” might be included with the service. For instance, is there any kind of presentation included with the fee? Does the firm charge for revisions or extra copies? Do they offer any pricing advantages for future updates?
There’s no one-size-fits-all approach to preparing a reserve study, so fees can vary greatly. A full reserve study for a small HOA with only a few common area assets will be less expensive than a multi-tower high-rise condominium development. The cost is determined by the amount of time required to prepare the study, which depends on factors such as property size and complexity, location, and the availability of project history and cost records. Other considerations include the level of service selected and turnaround time. Even the time of year can play a role. Most associations operate on a December 31st fiscal year end, meaning that reserve study firms can quickly become very busy in the summer and fall as their clients begin the budget process. Starting the study earlier in the year can be a way to save money on the fee and allows extra time for revisions and fine tuning. Most providers will be glad to offer a free, customized proposal, so don’t hesitate to ask!
There’s no one-size-fits-all answer as every association has unique components with different ages and replacement costs, varying amounts of reserves already in the bank, and so on. Looking at some of the internal analyses we’ve done among our clients, the answer is that financially strong associations typically contribute between 15 percent and 40 percent of the annual budget. Obviously, that’s a very large amount of money, but the important thing to remember is that reserves are an investment in the community. Every dollar contributed to reserves will ultimately come back to the association in terms of properly maintained buildings, good roads, modern amenities, and most importantly, satisfied residents. Residents living in an association have a tendency to think that reserves aren’t important because they won’t be living there by the time many of the projects actually take place. Not true! When it comes time to sell your unit, the new buyer is going to want to know how well the association is managed and how well-prepared it is for its future obligations. If the reserves are underfunded and the property is in disrepair, you can be sure the sale price will be affected.
Will Simons, RS, EBP
Credentialed Reserve Specialist and President, Association Reserves
Will Simons, RS, EBP, is a credentialed reserve specialist and president of the Florida regional office of Association Reserves, a national provider of reserve study services. Will has completed and overseen more than 2,500 reserve studies for multiple property types, including residential developments, schools, historic buildings, commercial developments, country clubs, worship facilities, marinas, and more. Will is a frequent author and speaker in the industry. He served for six years as the vice president and treasurer of his homeowners association in South Florida. For more information, call 954-210-7925 or visit www.ReserveStudy.com.