A reserve study is a budgetary guide designed to assist in development of an association’s reserve budget. This is done so by identifying a property’s major common assets that will require future repairs and eventual replacement, estimating costs, and scheduling associated future expenses based on their remaining useful lives. This process includes analysis and consideration of the property’s reserve funds, and analysis and projections of necessary future funding levels.
The purpose of a reserve study to ensure that associations have a comprehensive understanding of what is necessary to ensure adequate maintenance of their property, and that sufficient funds are available when major repairs or replacements are necessary.
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.
Cash Flow Method / Pooled Method – As defined by the nomenclature, the association’s reserve funds are “pooled” via this method. While the association’s funds are restricted to their individual components in the component funding method, the cash flow funding method allows all the reserve funds to be readily available for any and all necessary future reserve expenditures.
This method recognizes the interest that the association is earning from their reserve funds over the entire future funding period. While the association’s pooled fund balance will fluctuate over the years as expenses come due and contributions are made, the reserve fund balance will never go below $0, or the threshold that is set in the analysis (baseline funding vs threshold funding). This funding method accounts for the entire funding period and allows for projections of level annual funding for each of the years within 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 level of report is completed for a property that has not previously had a reserve study completed by our organization. The scope of work for this level includes an on-site meeting, review of the associations reserve budget, visual non-destructive inspection, and inventorying and quantifying components (through physical measurements and/or drawings).
A detailed draft report is then developed. The report includes a detailed property description, scope of work, photographs, detailed descriptions of the components, recommended maintenance, supported costs, useful life projections, and funding recommendations. Upon satisfactory review of the draft report, we will issue a 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.