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What is a Reserve Study? And Why Should Your Building Have One?

As you are preparing your 2019 budgets, the Reserve Study is a critical part of not just next year’s budget, but also long-term planning for your building. A Reserve Study is a comprehensive report of a property’s major common element components, as well as a budget planning tool. Without careful planning, common area components such as roofs, facades, parking garages, and mechanical systems can become serious financial liabilities when their replacement is required. A Reserve Study serves as a road map for planning the building’s budget, meeting all legal, fiduciary, and professional requirements, minimizing the need for special assessments, and enhancing property resale values.

Reserve studies give managers, board members, and property owners assurance that future common element expenses are identified early enough to implement a plan to pay for those projects. A common element is any piece of an association’s property that is owned by the community as a whole rather than by individual unit owners. Typically, common elements include the roofs, mechanical systems, parking garage, and external facade of the building(s).

A professionally prepared budget-planning tool, a Reserve Study includes both a physical and a financial analysis. The Physical Analysis includes a determination of all of the components which will require replacement as well as their replacement costs and estimated remaining useful lives. A site visit is performed in performing this analysis to visually inspect the property’s common elements. The Financial Analysis provides a Funding Plan as well as an evaluation of the association’s current reserve status (measured as a cash balance or percent funded).

The Funding Plan is intended to establish a stable and equitable plan to offset anticipated future major common-area expenditures. The engineer calculates a recommended reserve contribution rate (funding plan) and a projection of future income/expenses. This analysis tracks the reserve fund balance, annual reserve contributions, and the annual expenditure trends over a 30-year period allowing the association to make an informed decision in regard to how much money should be set into the reserve fund each year to feel comfortable that a special assessment will not be required.

Equally as important is keeping the reserve study updated. Every few years the report should be adjusted for all the local changes in replacement costs, actual and expected dates of replacement, and any changes in future reserve contributions. These changes occur from delayed or accelerated projects, extraordinary maintenance, extreme weather, advancements in construction methods, and materials and/or additions and deletions to the property.

By mapping out a path to financial and budget planning success, reserve studies clearly fulfill the board of directors’ fiduciary responsibility to their community association. In addition, reserve studies help to maintain the property’s value, appearance, and each unit owner’s investment. They also show potential buyers a more accurate and complete picture of your association’s financial strength and market value. Taking it a step further, a Reserve Study can be used as the starting point to reducing operating costs and optimizing energy, maintenance, and replacement expenses.

Overall, the careful inspection and financial analysis of a Reserve Study provides your building with a sophisticated management tool that will help them to balance and optimize long-term property values and membership costs. Although unexpected speed bumps (fire, floods, or car accidents that cause property damage) are bound to happen, a community with an updated Reserve Study will be better prepared to deal with them.

 

Mitchell H. Frumkin, PE, RS
Kipcon, Inc.
1215 Livingstone Ave., Suite 200
North Brunswick, NJ 08902
212-896-3803
mfrumkin@kipcon.com

 

 

 

 

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