A Reserve Study is a budget planning tool which identifies the current status of the Reserve fund and a stable and equitable Funding Plan to offset the anticipated future major common area expenditures. The Reserve Study consists of two parts: the Physical Analysis and the Financial Analysis. This document is often prepared by an outside independent consultant for the benefit of administrators (Board of Directors) of a property with multiple owners, such as a condominium association or Homeowners' association (HOA), containing an assessment of the state of the commonly owned property components as determined by the particular association's CC&Rs and bylaws. Reserve Studies however are not limited only to condominiums and can be created for other properties such as resort (shared vacation ownership) properties, apartment buildings, and office parks.[1]
Reserve Studies are in essence planning tools designed to help the Board anticipate, and prepare for, the property's major repair and replacement projects.
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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 Homeowner's Association or property manager can create a more effective budget which also helps them to determine an appropriate amount of dues to charge each homeowner monthly to put towards reserves savings, and make accurate disclosures about the status of the Reserve Fund to homeowners.
There are three results from a Reserve Study. 1) A listing of the major assets of the association to be funded through Reserves, their expected Useful Life, Remaining Useful Life, and Current Replacement Cost. 2) An evaluation of the current strength of the Reserve Fund (commonly expressed as "Percent Funded"). 3) A recommended multi-yr Reserve Funding Plan.
Reserve Studies are required more often in recent years by HOAs and Boards of Trustees for due diligence, budget and planning purposes. An increasing numbers of U.S. states today requires Reserve Studies. Fannie Mae and the Federal Housing Administration also now require Reserve Studies in order for development projects to be approved for FHA insured loans and Fannie Mae lending products and services.
In addition to being helpful planning tools, Reserve Studies for Community Associations are legally mandated in 25 states (such as California, Florida, Hawaii, Nevada, Virginia, Washington, etc.), either for budget preparation or homeowner (and prospective homeowner) disclosure purposes. In California, the relevant law is California Civil Code 1365.[2] In California, the law requires an annual Reserve Study Update, with that update prepared on the basis of a "diligent visual site inspection" at least every third year. With the passing of SB 278 in 2010, the state of Utah now also requires condominium and community associations to conduct and review reserve studies on a periodic basis.[3] Reserve contributions are often one of an association's largest budget line items (often 15-40% of the total budget), and the Reserve Fund is typically the association's largest financial asset. This means annual review of Reserve contributions and annual disclosure of the status of the Reserve Fund are prudent.
On June 30, 2011 the Department of Housing and Urban Development published Mortgagee Letter 2011-22 which made Reserve Studies mandatory for all new condominium conversions applying for FHA insured loans approval, including gut and non-gut rehabilitation conversions. This new guideline went into effect September 1, 2011. Condominiums that fail to submit a compliant, recent and accurate Reserve Study, the development must add a budget Reserve line item in its budget equal to 10% of the yearly assessment income. The FHA enforces the 10% budget line item requirement nationally by prohibiting lending in developments that are non-compliant with this requirement. [4] Additionally, Mortgagee Letter 2011-22 stipulates all other condominiums requesting FHA project approval may be required to submit a current (completed within the last 24 months) Reserve Study at their discretion or whenever financial documents do not appear to meet sufficient funding requirements of the condominium association.[5]
On December 1, 2010 Fannie Mae published Announcement SEL 2010-16. The new guidelines outlined in the announcement went into effect March 1, 2011. The guidelines made Reserve Studies mandatory for all newly converted, non-gut rehabilitation condominium developments to be eligible Fannie Mae project approval. [6] All other types of condominiums have the option to submit a compliant Reserve Study or must add a budget line item for Reserves equal to 10% of the yearly assessment income.
There are several Reserve Study Funding Methods and goals. These methods may be used to develop a funding strategy that corresponds with the risk tolerance of the community. In National Reserve Study Standards terminology [7], there are two basic Funding Methods: "Cash Flow" or "Straight Line". In the same National Reserve Study Standard terminology, there are four Funding Objectives: Full Funding, Threshold Funding, Baseline Funding, and Statutory Funding. Due to its greater computational flexibilty and its ability to allow the user to focus on and achieve any of the four Funding Objectives, the "Cash Flow" Method has seen significant growth in popularity. [8]
"Full Funding" describes the objective to have Reserves on hand equivalent to the value of the deterioration of the each Reserve component. For example, for a $10,000 (current cost) pool resurface project with a Useful Life of 10 years, after two years, when the pool's surface has deteriorated 2/10ths of $10,000, to be Fully Funded the association should have $2000 set aside for this component (and on and on again for each component). "Full Funding" describes an objective where deterioration is offset by the accumulation of cash.
"Baseline Funding" describes the objective to have sufficient Reserves on hand to never completely run out of money. This is sometimes described as a "cash-positive" plan. With less cash in Reserves on-deposit, associations with a Baseline Funding objective have higher instances of special assessments and/or deferred maintenance. [9]
"Threshold Funding" describes an objective chosen by the Board other than the 100% (Full Funding) level or just staying cash-positive (Baseline Funding). This may be a specific Percent Funded target or a cash balance target. Threshold Funding is often a value chosen in-between Full Funding and Baseline Funding.
"Statutory Funding" describes the pursuit of an objective as described or required by local laws or codes.
Reserve Studies can be created by volunteer Boardmembers, their professional managers, obtained through a variety of professionals specializing in the preparation of Reserve Studies, or large architectural or engineering firms who complete Reserve Studies as a small aspect of their larger business. Recently, certification criteria have been created to allow for a more ordered system of identifying those individuals who have been specifically trained in the creation of Reserve Studies. One such certification, that of Reserve Specialist (RS), is available through the Community Associations Institute (CAI). To obtain this certification, candidates must have prepared at least 30 reserve studies within the past 3 calendar years, hold a bachelors degree in construction management, architecture, or engineering (or something equivalent based on experience and education), and complied with various other rules and codes of conducts.[10]
Another credential is the Professional Reserve Analyst (PRA), created and promoted by the Reserve Study industry's own trade organization, the Association of Professional Reserve Analysts (APRA). [11] The PRA credential takes more years of experience to qualify than the RS credential.
There are three types of Reserve Studies, differing in how exhaustively the Physical Analysis is conducted. These three types of Reserve Studies allow the association to select the "Level of Service" appropriate to their current budget preparation and disclosure needs. Listed beginning with the most exhaustive, they are: 1) "Full" Reserve Study (creation of the Reserve Study, involving creation of the component list, measuring/quantifying all Reserve components, and development of the Useful Life, Remaining Useful Life, and Current Replacement Cost based on a diligent, visual on-site inspection) 2) "Update With-Site-Visit" Reserve Study (an update of an existing Reserve Study involving a diligent visual on-site inspection, but presuming that all components have been properly identified and quantified) 3) "Update No-Site-Visit" Reserve Study (an update of an existing Reserve Study without a site inspection, done by client interviews and interviews with knowledgeable vendors and service providers)