Reserve StudyThis week’s word is Reserve Study.

A reserve study is a study of the association’s reserve account requirements which identifies the major components for which the association has maintenance responsibility and their probable remaining useful life. It estimates the cost for the components and the total contribution necessary to finance those costs.

The purpose of the reserve study is to give those overseeing the maintenance of the property a better idea of what major expenses to expect and an educated estimate of when these expenses will occur. With this knowledge, the association board or manager can create a budget, so association members will make their fair share of reserve contributions, designed to offset the slow but steady ongoing reserve component deterioration at the association.

In addition, the reserve study provides important annual disclosures to association members about the condition of common area components, and the level of preparedness (strength) of the reserve fund.

Reserve study analysis presumes replacement of “like kind” systems. The study is not intended to provide upgrades to the building systems, unless such systems are no longer manufactured.

As an example, the details regarding the roof for a condo association would likely include the following information:

  • When was the current roof installed/built?
  • What is the typical life of this kind of roof?
  • How many years of life are remaining?
  • What is the replacement cost?
  • How much have we saved to replace the roof?
  • How much more money do we need to save each year to have enough to replace it, when that time comes?

Do I really need a reserve study for my association?

NO. You do not have to hire someone and build a formal study, but you should.

Why?

If you have a condo association, you MUST include reserve accounts in your budget.

If you have an HOA, you you MAY include reserve accounts in your budget, depending on what your documents say.

If you are going to put this in the budget, it makes sense to have a proper study, which can then be updated periodically.

Here is the key language from the Florida Statutes:

Chapter 718 – Condominiums:
In addition to annual operating expenses, the budget must include reserve accounts for capital expenditures and deferred maintenance. These accounts must include, but are not limited to, roof replacement, building painting, and pavement resurfacing, regardless of the amount of deferred maintenance expense or replacement cost, and for any other item that has a deferred maintenance expense or replacement cost that exceeds $10,000. The amount to be reserved must be computed using a formula based upon estimated remaining useful life and estimated replacement cost or deferred maintenance expense of each reserve item. The association may adjust replacement reserve assessments annually to take into account any changes in estimates or extension of the useful life of a reserve item caused by deferred maintenance.

Chapter 720 – Homeowners’ Associations:
In addition to annual operating expenses, the budget may include reserve accounts for capital expenditures and deferred maintenance for which the association is responsible. If reserve accounts are not established pursuant to paragraph (d), funding of such reserves is limited to the extent that the governing documents limit increases in assessments, including reserves. If the budget of the association includes reserve accounts established pursuant to paragraph (d), such reserves shall be determined, maintained, and waived in the manner provided in this subsection.

Click here for more information on reserve studies.

Here is a more detailed explanation on reserve studies as they pertain to condos.

To learn about the reserve study process, click here.

by Dan Tiernan, COO, Campbell Property Management