The Proper Reserve Study1

“In preparing for battle I have always found that plans are useless, but planning is indispensable.”

- Dwight D. Eisenhower

Last time I explained why the need for a Reserve Study exists. This time, some ideas of what you should have in one.

First, as a reminder, a reserve study is simply a better budget planning tool that identifies the components an association is responsible to maintain or replace, the current status of the reserve fund, what is needed and when and how to properly fund it to offset anticipated future major common area expenditures.

A good reserve study will encompass all of the common area maintenance areas such as paving, walkways, siding, fences, pools, clubhouses, i.e. anything not part of the units. As such here's what to check for and see if the company actually looked at the property:

• The number of Units, just to check and see if they actually have done some research and have the right association

• A description of the community, so you know they have been on site and have seen things that might not be on the site plan, such as a culvert, gazebo, or any other improvement done after the creation of the site plan

• A list of all assets, e.g. pool, roofs, siding, clubhouse, paving, lighting pump houses, nature trails, without which you don't know if the reserve study will be accurate as it may have left out items you will need to repair

• A statement as to current reserves, without which any figure as to what is needed is silly as it should be offset by what you already have

• The methods used to evaluate the reserve fund status - did they inspect, check local material costs, use a national algorithm, etc.

• The time period when it as prepared. It may sound silly because you have just undertaken one, but if you are going to use the reserve study as a guide for 20+ years, it's important to know 15 years from now when the study was undertaken and how much time is left before needed repairs arise on the horizon

• The recommend reserve contribution needed over the life span of the reserve study, i.e. the expected amount of money it will take to properly fund paving, roofing, pool replacement, lighting, curbs, etc over the next many years of the life of your association. In turn, this figure will help you figure out how to get that money, i.e. a large special assessment, a large, immediate increase in condo fees, or a little bit of both phased in over a few years

• The expected useful life of each component, to show when it will likely need replacement.

• A statement of what is presumed for inflation for repairs over the years, and what is expected an association will get for interest in its investments yearly.

Perhaps the biggest benefit to having a proper reserve study for a Board of Directors is it takes all the pressure off of the board as to why it is raising fees in any given year as it can simply tell the unit owners it is following the guidelines set by the reserve study which required an increase to help drastically decrease the need for a loan or a special assessment.

Here's the important part. Get one. Realtors have told me that if an association has a proper reserve study it will add at least $10,000.00 to the value of each Unit . Why? When you go to sell your unit, or your estate does, prospective buyers will not be looking just at your unit and others in the same association.

They will be looking at other units in other associations. If your association can hand over to a prospective buyer a reserve study that goes out 20-30 years detailing what will be done, when, how all is funded, and when condo fees increase (gradually) over time to properly fund it, so there is little chance of a surprise special assessment or a loan, that's gold in comparison to the other associations in which they are looking at units that lets them know, “Fred took care of that and he says we have plenty of money.”

So get a reserve study done, if you have't already, in the next year or two. It's the best money you're going to spend at your Association. Even better than money spent to pay legal fees.

1Much of the thanks for this column can be given to the Community Association Institute 2023 Law Seminar presentation entitled Report #1, Reserve Studies and Reserve Studies Management, published by the Foundation for Community Association Research, Falls Church, Virginia.