A reader asks us what a reserve study is and if he needs one for his condominium complex.
Reserve studies are long-term capital budget planning plans to offset ongoing facility deterioration, resulting in sufficient funds when those anticipated major expenditures actually occur.
A reserve study anticipates and prepares for a facility’s major common area repair and replacement expenses. It’s a little bit art, because we are making projections about the future. It’s a little bit science, because the work is a process of research and analysis.
In the report you should find reserve component lists and cost estimates. The report should contain estimates for each item’s useful life, remaining useful life, and the current repair or replacement cost for each major component.
There is a standard four-part test to determine which expenses should be funded through reserves. First, it must be a common area maintenance responsibility. Second, the component must have a limited life. Third, the limited life must be predictable. And finally, the component must be above a minimum threshold cost. This limits reserve components to major, predictable expenses.
Establishing the useful life of a component is calculated by:
- Visual Inspection
- Database of other Association Reserves
- Facility Component History
- Vendor/Consultant Evaluation and Recommendation
Financial projections are based on the average of our best-case and worst-case estimates, which include:
- Cost History
- Comparison of work done at similar associations
- Vendor Recommendations
- Reliable National Industry cost estimating guides
Reserve cash balances can measure reserves, but the true measure is whether the funds are adequate. Adequacy is measured in a two-step process:
- Calculate the facility’s Fully Funded Balance (FFB).
- Compare to the Reserve Fund Balance, and expressed as a percentage.
The FFB grows as assets age and the Reserve needs of the association increase, but shrinks when projects are accomplished and the reserve needs of the facility decrease. The fully funded balance always evolves, and is a moving but generally predictable target.
SKSP is always available to help with preparing Reserve Studies. Contact us for more information.