The Importance of Reserve Studies

nordlund_9608As we enter into a new year many associations are adopting a new budget, many of which contain a reserve study. Here at Leland we recommend that associations maintain a current reserve study as a barometer for future expenses that are non-annual. A reserve study provides a current estimate of the costs of repairing and replacing major common area components (such as roofs or pavement) over the long term. Ideally, all major repair and replacement costs will be covered by funds set aside by the association as reserves, so that funds are there when needed. This requires: examination of the association’s repair and replacement obligations; determination of costs and timing of replacement; and determination of the availability of necessary (reserve) cash resources.

Because the board has a fiduciary duty to manage association funds and property, a replacement reserve budget is very important. Not only does this information supplement the annual operating budget in providing owners with financial information; the reserve study is also an important management information tool as the association strives to balance and optimize long-term property values and costs for the membership.

Potential buyers may want request a copy of the reserve study before purchasing. Fully reviewing and understanding the reserve study is an important part of evaluating the value of an association. For association members, reserve planning helps assure property values by protecting against declining property values due to deferred maintenance and inability to keep up with the aging of common areas and amenities.

A good reserve study shows owners and potential buyers a more accurate and complete picture of the association’s financial strength. The reserve study should disclose to buyers, lenders, and others the manner in which management of the association (i.e., the board and management company) is making provisions for non-annual maintenance requirements. Preparing a reserve study calls for explicit association decisions on how to provide for long-term funding, and on the extent to which the association will set aside funds on a regular basis for non-annual maintenance requirements. A good reserve study may also function as a maintenance planning tool for the association.

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