Heritage Circle Condominiums

The Reserve Study

If you are like most people, you might ask “what is a reserve study and why do I care?” Let’s take a minute to understand what it is and why it is important.

A Reserve Study, commonly called an RS, is a technical and financial analysis of assets within a common interest development (CID) such as a condominium complex or condo hotel. Depending on the type of association that governs the property and the association’s declaration or by-laws, reserve analysis and funding requirements vary. Requirements for the establishment of association reserve accounts also vary from state to state.

The Reserve Study is simply a tool used by associations to determine what is needed to maintain the property. Reserve accounts are established and maintained to hold funds for the long-term or deferred maintenance and replacement of any assets that the associations is responsible for.

Even though these studies tend to be lengthy and not very exciting to read… it is worth your time and effort to know what they have to say if you are an owner in that CID. Your association’s Reserve Study should include the following elements in a clear, easily understood format:

· Components, with a useful life of less then 30 years, need to be inventoried in detail.
· What the remaining useful life estimate of each component is.
· The current replacement cost for each component.
· An analysis of the current financial condition of the association.
· Funding recommendations, disclosures and a funding summery.

Time and usage will always bring about the deterioration of common elements of any property, so the establishment of an association reserve account is both necessary and prudent. The Reserve Study ensures that a funding schedule is established for the maintenance, repair and replacement of major common area components.

“A Reserve Study is sometimes looked at as a necessary evil, when in fact it is much like going to the doctor for a physical, when you are feeling fine… It’s like a physical for your property!” – Larry Vanderhoof (Reserve Professional)

A physical for your property… what a great idea! A check up, if you will, on the financial stability of your investment in a condominium or timeshare property. Wouldn’t you agree that the Reserve Study really is our friend? Now that you understand what a reserve study is, you are no doubt wondering if you need one and why!

Remember what our industry professional Mr. Vanderhoof said, “It’s like a physical for your property!”

Why do you get an annual physical for yourselves and your loved ones? To see how your health is of course, how is your cholesterol, your blood sugar, your blood pressure and what are ‘your vital signs’. This information tells your physician about your overall health and if there are signs of future problems.

So, why not do the same for your investments. How are the financial “signs” looking for your investment property? Could it be that our friend the Reserve Study will provide us with vital information about the overall health of our condominium or vacation property?

Here are just a few of the reasons that a Reserve study should be done on all common interest developments:

· The RS provides management accountability in the form of a written, historical record and helps to document good stewardship of association assets and reserves.
· The RS offers an invaluable management tool for long range planning and advanced scheduling of major repairs or replacement of components.
· Owners are assured that their investment will be enhanced over time through an equitable and systematic approach to accumulating the replacement reserves.
· The RS establishes a schedule by which funding for maintenance, repair and replacement of common area components are achieved and provides assurance that funding to maintain the property will be available when needed.

Take a few minutes today to see if your vacation property or condominium association has had a “physical for your property” this year… or last year… or ever!

You will feel better knowing the financial health of your investment.

Now you know what a Reserve Study is and why you need one, but how do you know if it is worth the paper it is printed on?

There are many companies that offer a Reserve Study as one of their services, but unfortunately the quality and content varies as much as the companies that offer them. So, how do you know if your association’s Reserve Study is a useful tool or a waste of association resources?

Start by focusing on the qualifications of the individual that is providing the analysis for the report, instead of the company that employs the analyst.

Has this person earned the designation RS (Reserve Specialist) for work in the field? What about actual experience in the construction industry, in other words do they understand how the structure was built or how to calculate the costs of material and labor for repair or replacement of a component? After all, isn’t the purpose of the report to provide the costs associated with future repair or replacement of common area components… and a schedule for a systematic approach to accumulating these reserves?

For Reserve Study purposes there is a difference between those individuals that understand the theory or finances behind a project and those that actually make it happen, just some food for thought.

The American Institute of Certified Public Accountants (AICPA) and the Community Associations Institute (CAI) have both published guidelines which dictate minimum requirements for what constitutes a thorough Reserve Study.

For additional information you can subscribe to a great publication call Common Ground, it is a bimonthly magazine published by Community Associations Institute, a national, nonprofit organization that provides information, tools and resources to community association board members, professional community managers and other professionals who support common-interest communities. http://www.caionline.org.

CAI also has an informative book called Reserve Funds that offers a wealth of information to community associations. If you are a member of an association or a board member of one, it is well worth your effort to contact them for a copy.

So now you have determined that your analyst is a well qualified, professional Reserve Study provider, great! What else should you be concerned about?

Is the report presented in a clear, easily understood format? Do you look at it but wonder who you should hire to help you decipher it? Some reports on the market will confuse even the most seasoned professional, so don’t be dismayed. For the report to be a useful tool, your association might need a new provider!

Most of you don’t have to worry because your association or management company is taking care of these matters, as they strive to do their fiduciary duty in good stewardship but in is always prudent to be proactive in the protection of your investments.

Now you know what a Reserve Study is, why you really do need one and what to look for in a good Reserve Study provider. I am sure that you agree the Reserve Study truly is our friend.

http://www.clararose.com
http://www.refugeintl.org/our-friend-the-reserve-study.html

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