Reserve Studies for Management Professionals

By: Robert A. Felix, CMCA, PCAM, RS - The Felix Reserve Group

An association should conduct a reserve study and fund in order to plan for future capital expenditures, ensure the board is fulfilling their fiduciary duty and avoid surprise capital expenses or the loss of an asset, amenity or lifestyle.

Competent common area capital analysis and reserve funding decisions are key elements to a successful community association in today's housing market.

A reserve study is a budget-planning tool that identifies the current status of a reserve fund and sets forth a stable and equitable funding plan to offset the future expense of replacing major capital components within the association.

A board has the responsibility to preserve, maintain and enhance the value of the assets of their community, and with that premise they need to consider three important matters for when dealing with their reserve study.

1) Reserve Expenses are inevitable

Managers and board members need to ask themselves before their community members do, "how prepared is our Association to handle future capital expenses"? Each association is unique and independent in the quest for maintaining a level of quality of the common areas, and each board member should look to professionals to assist them in completing and understanding the importance of a reserve study. Reserve expenses could happen at any time in the future, but we’re assured of one thing – they will happen.

2) Reserve Planning is essential

Planning won't help an association avoid reserve expenses, rather planning will help them minimize surprises and prepare them for successful replacement implementation in a timely manner. Planning is not a one-time event, rather a
continual effort to maintain the most accurate and current physical and financial information available. An annual update of component changes, financial adjustments and community goals should be part of the pre-budget planning
process. If properly conducted, planning will lead to a confident and useful tool for a Board’s financial decision making process.

3) Loss of Use or Special Assessment Risk can be measured.
With the proper analysis, time and commitment, community associations can be fiscally responsible and financial sound. If they fail to plan or fund that plan, they will eventually be responsible for the repair or replacement of their capital components, or the loss of use of amenities, common areas and quality. Statistics show that if an association is funded less than 30%, there is a 33% chance of needing a special assessment to cover for the loss of a component, or
the chance of loss of enjoyment or use of that component. 

The buying public is getting smarter about the financial health of community associations, since too many residential purchases in community associations are fraught with problems of financial concerns of the association. Surprise special assessments and large increases in fees need to become a thing of the past, as communities, boards and managers all work to create a solid financial position for the care of their own capital assets.

Some sound reserve study principles should be followed by a board when performing their fiduciary duty:

• Update your component information every year
• Track major component changes
• Follow the spending plan – not the component failure
• Know your critical versus non-critical components
• Understand and apply the concept of accelerated deterioration to your replacement plan
• Since a reserve study is purely an estimating service, ensure you update your estimates regularly
• Don’t forget to include the community’s expectation of quality in your analysis