What Is A Reserve Study
A Reserve Study is a budget planning tool which identifies the current status of the reserve fund and a stable and equitable funding plan to offset the anticipated future major common area expenditures. The reserve study consists of two parts: the physical analysis and the financial analysis. Our budget and finance committee is soliciting proposals to update our Reserve Study for next year’s budget. Source: CAI National Reserve Study Standards (pdf)
As long range budget tools, Reserve Studies serve several key purposes of which consumer protection via future funding disclosure is crucial. These studies also fulfill statutory requirements, governing document requirements, long range planning needs, sales disclosures, loan qualifications, HUD requirements, insurability requirements, and other purposes. Each year, the Reserve Study funding plan supplies the necessary reserve contribution amount required within the annual operating budget.
Reserve Study physical analysis is performed prior to the financial analysis. Physical analysis involves component inventory development and component cost and life estimations. Component inventory development includes identification, quantification, and condition assessment. Component cost estimation includes expenditure history, vendor/contractor proposals, reserve provider cost databases, industry cost estimators, and other sources. Life estimations are based on known in service dates, historical replacement schedules, apparent usage conditions, current condition, vendor/contractor input, reserve provider life databases, industry life estimators, and other sources. Other life and cost estimates come from professional service providers such as engineers, architects, and construction managers or various other published materials and professional experience.
Physical analysis produces an expense forecast representing the long term financial obligation to maintain, repair, and replace the component inventory. This expense forecast indicates when components will be replaced and the costs during those replacements. Most components are replaced one or more times during the typical 30 year Reserve Study expense forecast.
The financial analysis is performed after the physical analysis and is repeated after any physical analysis revision. Financial analysis generates a 30 year funding plan that ensures adequate funds are available when every component replacement is performed over the course of the 30 year expense forecast. The funding plan indicates the necessary annual reserve contribution amounts for each of the 30 years. Since one of the funding plan’s objectives is to smooth out the irregular reserve expenses, the annual reserve contribution won’t equal that year’s projected reserve component expenses. There are various funding methods and goals which are determined through consultation with the reserve provider. The funding plan’s reserve contribution amount is included within the annual operating budget as the “Reserve Contribution” expense line item.
Where needed, Reserve Study funding plans are also used to model special assessments, bank loans, and other unique funding situations. Reserve specialists recommend any one or even a combination of these funding sources to meet the client’s specified needs.
Reserve Studies offer a long range plan and long term disclosure thereby avoiding unpleasant financial surprises.
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