A reserve study serves as a financial roadmap to help in the formulation of an association’s reserve budget. Its purpose is to identify the key communal assets of a property that will require repairs and replacements in the future, estimate the associated costs, and establish a schedule for these expenses based on the remaining useful life of these assets. This comprehensive process entails analyzing and considering the property’s reserve funds, as well as making projections and analyzing the required future funding levels.
The purpose of a reserve study is to help associations understand what they need to do to properly maintain their property and have enough money for major repairs or replacements when needed.
Structural Integrity Reserve Study (SIRS)
A Structural Integrity Reserve Study (SIRS) is a new form of reserve study. It identifies and outlines a funding plan for replacement of specific condominium reserve items now required per Florida Statute SB 4D. These items include replacements of roofs, structural systems, fireproofing & fire safety, exterior painting & waterproofing, electrical systems, plumbing systems, windows & exterior doors, and all components over $10,000 that have an impact on a building’s structural integrity.
All condominium projects with three or more stories must comply with the new safety bill, as stated in the statute. For condo projects located within three miles of the coast, they must conduct the initial study 25 years after the certificate of occupancy has been issued, and for everywhere else in Florida, they must conduct the study prior to 30 years. Subsequently, a new study will be required every 10 years. Please note that this bill is new, and there may be future changes.
The new bill mandates that Florida condominium associations appropriately fund the aforementioned building components in accordance with the structural integrity reserve study to comply with the new law. Qualifying projects must meet the compliance deadline of 12/31/2024. Associations still retain budgeting discretion for other property components that do not fall within the parameters mentioned above.
Types of Funding
There are generally two main, and widely recognized ways to fund reserves. The Component Funding Method – also called The Straight-Line Method, and the Cash Flow Method – also called The Pooled Method. Our reports detail our projections for both funding types so that the association can make their determination on how they would like to fund their reserves. Both funding levels are appropriate and comply with state statutes.
Component Funding Method – For this funding method, the unfunded balance of each component is divided by its remaining useful life. The sum of the components results in the annual reserve contribution. The component funding method only develops the annual contribution for the first year of the analysis, as the new balances and remaining useful lives will be different for the following years, thus affecting the required annual reserve funding level for future years.
The Cash Flow Method – also called the Pooled Method, combines the association’s reserve funds. Unlike the Component Funding Method, where the association’s funds are limited to specific components, the Cash Flow Funding Method makes all the reserve funds easily accessible for any future expenses.
The association earns interest from its reserve funds throughout the future funding period. While the pooled fund balance will change over the years due to expenses and contributions, the reserve fund balance will never go below $0 or the threshold established in the analysis. This method of funding allows for consistent annual funding projections for each year of the funding period.
While not always true, this funding method often results in a lower annual funding requirement than the component funding method.
The Process & Reporting Levels
- Level I
- This report is done for a property that hasn’t had a reserve study done by us before. The work includes a meeting on-site, reviewing the association’s reserve budget, visually inspecting without causing damage, and recording and measuring components (using physical measurements or drawings).
- A detailed draft report is created. This report contains a detailed description of the property, the work to be done, photos, detailed descriptions of the parts, recommendations for maintenance, estimated costs, projections for the useful life, and recommendations for funding. After reviewing the draft report and making any necessary revisions, we will provide the final full reserve study report.
- Level II
- This is a reserve study update with site-inspection. This level of report is completed after a previously completed initial Level I report and encompasses everything in a Level I report. However, for this report level, we are re-assessing the previously established components, reserve budget, costs, and remaining useful lives.
- Level III
- This is a reserve study update report without site inspection. A Level III reserve study report is based on the previously completed Level I or Level II reserve study, and we rely on the association for details regarding any physical changes to the property since the last report. This report level also includes a current re-evaluation of costs, useful lives, and the associations reserve budget. A draft report is not included with this report level.
- Level IV
- This report level is designed to address proposed construction projects. The inventory, components, and quantities are based on provided construction plans and site plans. A Level IV reserve study report establishes the reserve components. Costs and useful lives are based on industry standards. A draft report is not included with this report level.