Your building's reserve is more than a rainy-day fund. Conducting regular reserve studies is a responsible governance practice that helps you stay informed about your building’s financial health, mitigate potential financial risks, and plan for upcoming capital improvements and expenditures.
A reserve study is a comprehensive assessment of your building’s financial health. Just like how you prioritize getting regular checkups to maintain your physical health, conducting regular reserve studies helps you maintain the financial health—which can dictate the overall health—of your property. Taking a proactive approach can identify potential financial issues early on and address them before they become major problems.
Why reserve studies matter
Your reserve strategy affects your building's monthly common charges, special assessment, and monetization approach. Having a right-sized reserve affects your building's ability to fund necessary maintenance, improvements, meet local regulation and compliance—and even affects the building and future buyers' ability to qualify for a loan. A reserve study helps you understand and set appropriate goals.
How often should a reserve study be conducted
It is recommended that HOAs conduct a reserve study at least every three years to stay on top of your property’s financial condition. In 11 states, it’s required by law to conduct a reserve study or reserve schedule. For instance, in Washington state a reserve study must be performed every three years.
Who should conduct a reserve study
The board should commission a reserve study by an experienced individual or organization. The right provider will thoroughly assess your building’s physical and financial assets and develop cost estimates and funding recommendations based on the data. This includes estimating remaining use on common area components like the roof, elevator, mechanicals, or other building components to plan for replacements.
In locations like New York where new regulation requires retrofits and upgrades for meeting sustainability goals, the provider should also have an understanding of what these expenses will look like.
How reserve studies are conducated
1. Gather data on assets
The first step is to gather data on your building’s assets. The provider will begin by conducting a physical inspection of the common areas, gathering information on their condition, and reviewing the maintenance and repair history. They will also review your HOA’s financial statements and records to get a complete picture of your building’s financial condition.
2. Develop cost estimates and funding recommendations
After gathering all the necessary data, the provider will estimate the remaining useful life of your building’s physical assets and develop cost estimates for future expenses, such as repairs, maintenance, and replacements. They will also identify funding sources for the reserve fund and compare the balance to the projected expenses, determining whether adjustments are needed to ensure the fund is sufficient. Based on their findings, they will make recommendations for funding, including any additional funding required in the future.
3. Review and update the study regularly
To ensure that the study remains relevant to the current needs, it’s essential to review and update it regularly. Your property’s financial needs will change over time. As the physical assets of your property age, they may require more frequent maintenance or repairs, which can impact your financial resources. New regulation and building requirements must also be included and updated in the plan. Updating a reserve study helps you stay on top of any changes in your financial needs and plan for future expenses based on the most current information.
Running a well-maintained building requires attention to both physical and financial needs. A reserve study helps to make better financial decisions, deploy funds more responsibly, and plan for the knowns—and unknowns.
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