Currently mandated in approximately 20 States, Reserve Studies are performed to ensure that Property Managers, Homeowner Associations or other vested parties have the financial resources available to maintain common elements not covered by owner’s responsibilities. The increase in foreclosures has impacted this area because more and more mortgage lenders, underwriters and investors want to make sure their investment is secure financially and in good physical shape.
What is a Reserve Study?
“A reserve study is a budgeting guide which provides a detailed inventory of all the common element components with (usually) 2-30 year useful lives that will need to be repaired or replaced. The reserve study determines the remaining life of each item, the cost to repair or replace it and calculates the annual contribution required to adequately fund each item. If an adequate funding plan is followed, special assessments will be unnecessary.”Ernest Lahti writing for APRA Newsletter Sept-Oct 2009
In essence, a Reserve Study is the gathering of property asset information and then planning to make sure there is money available for major repairs and the planned replacement of identified assets (like roofs).
Why do a Reserve Study?
Physical assets deteriorate over time. It is not a question of if but when. Assets include but are not limited to:
- Pool and recreational equipment
- Retention ponds
- Maintenance equipment/tools
The repair or replacement of assets is usually paid for with an assessment or the allocation of funds to be put aside on an annual basis until needed. One of the objectives of the Reserve Study is be able to correctly plan the date on which an asset will need replacing.
“The Governing Documents of most associations require the Board to collect an appropriate amount of money on a regular basis to offset the ongoing deterioration of the common areas. Most of the “major” components which the association is responsible to maintain will require replacement in a predictable manner…It is irresponsible to create a financial emergency (special assessment) which could have been avoided by advance planning.”Robert M. Nordlund, P.E. Association Reserves,Inc.
Without a Reserve Study property managers and HOAs may not be able to pay for major repairs or the replacement of common assets without the dreaded special assessment. In addition, not all owners may have the capability to pay their share at the time the special assessment is levied.
What are the contents of a reserve study?
Reserve studies have three major components; 1) a complete inventory of all assets, 2) a capital planning report that recommends the reserve schedule of the monetary collection and expenditures over a period of time and 3) a schedule for performing the repairs and maintenance.
“A reserve study should include the following:
Although there are various types of reserve studies (full, update/on-site, update/off-site) they should be conducted by experienced professionals. Reserve Studies done by people without proper credentials may be considered invalid. A few recognized firms are:
- Association Reserves, Inc. – Association Reserves, Inc. is a professional engineering consulting company that has as our focus the preparation of Reserve Studies for Community Associations. Established in 1986, we currently have clients in 37 states and perform close to 1000 Reserve Studies each year.
- Regenesis -Regenesis.net is the home of The HOA ExpertTM Richard Thompson who offers personalized solutions to the most complex HOA issues.
- The Helsing Group, Inc. – The Helsing Group, Inc. provides a full range of consulting services to community associations. Our service is based on many years of cooperation with builders and homeowners. Serving the entire United States, our Reserve Study provides a complete evaluation of your association’s reserve funding requirements.
- Complex Solutions, Ltd. – Formed in 2001 with the idea that what the Reserve Study industry needed was a company that combined professionalism and accuracy with the highest standard of customer service. Complex Solutions is dedicated to providing a simple and understandable solution to Community Association’s Reserve Study needs.
The Association of Professional Reserve Analysts is the national trade organization for members which hold the Professional Reserve Analyst (PRA) credential. The PRA requires years of full time experience performing reserve studies and numerous client references to prove it. A list of PRA members and their contact information is available on their website.
Homeowner Association, Business Owner, and Property Manager Business Savvy
One of the objectives in any type of real estate investment/operation is to make money from the anticipated appreciation of the property. Herein lies an opportunity. Should you invest your money in short term cosmetics or in longer term solutions to maintain the infrastructure?
The answer is highly dependent on the length of time the investment is expected to be carried. Realistically, a short-term investor (<3 yrs) will probably opt for the cosmetic improvements. Longer term investors may not be sure yet. Significant factors may include the state of the economy and the ability to sell the property. The longer the property is to be carried the greater the impact of a asset maintenance solution. Knowing how to take advantage of your Reserve Study is crucial.
How using your Reserve Study can help save you money
Once a reserve schedule has been determined, property managers, homeowner associations and investors need to make smart business decisions. The biggest mistake property managers, and homeowner associations make is letting the data gathered during the Reserve Study sit on a bookshelf collecting dust. The smart decision is learning how you get the volumes of asset data that was collected to increase your Return On Assets (ROA).
One method to avoid this mistake and maximize your ROA is to set up a preventive maintenance program. Your Reserve Study contains most of the asset information necessary to load a program that tracks assets, schedules work orders, schedules inspections and efficiently maintains your property. Failure to maintain your assets (roofs, siding, common areas etc.) will almost guarantee that the assets do not realize their full useful life. Maintenance based on need only results in earlier replacement expenses. Early replacement may cause a special assessment to take place.
A good solution preventive maintenance solution can reduce annual operating costs by:
- Organizing workflow and eliminating archaic paper-based systems
- Decreasing labor costs through a reduction of reactive maintenance work
- Discovering repair issues before they become major replacement costs.
- Tracking equipment location and status
- Using handheld devices for date/time stamps and increased accuracy
Other benefits include
- Lower liability from claims due to alleged negligence
- Lower and more accurate maintenance budgets
- Capital planning tools
- Better asset details for the next Reserve Study
What does a Reserve Study have to do with an EAM or CMMS?
Preventive maintenance is a significant component of most Enterprise Asset Management (EAM) systems or Computerized Maintenance Management Software (CMMS). An EAM/CMMS solution is not just for large facilities. New advances in technology and scalability make an EAM/CMMS solution a natural fit with the data a Reserve Study generates. The result is a great tool to help maximize your ROA.
How do you utilize the data from your Reserve Study? We would like to hear your story.