Reserve studies are crucial for homeowners associations because they will help maintain financial stability while also planning for potential future expenditures. It takes a qualified professional to ensure the accuracy and precision of such a task…a Reserve Specialist!
A Reserve Specialist collects the data needed for input into the reserve study formulas. They are responsible for preparing an inventory of an association’s physical properties and gathering all of the relevant information which will determine the annual reserve contributions.
The accuracy of the data entered will directly relate to the usefulness and reliability of the reserve study in being a tool for the management of an association’s finances and physical properties. The factors which can greatly influence the quality of the reserve study must be based on realistic facts. Using false or unrealistic estimates of an asset’s age, condition, or replacement cost will leave an association financially unprepared for the inevitable replacement or major repair work that must be done at a future date. Such accuracy includes:
- quantitative measurement of the assets (e.g. square footage, number of items, etc.)
- realistic age estimates
- the expected replacement or major repair costs
- the repair/replacement history of each item considered in the study
- A Reserve Specialist must put the information in two primary categories: the Physical Property Analysis and the Financial Analysis.
Physical Property Analysis
A Physical Property Analysis aims to compile specific information about each of the association owned assets including:
- a component inventory
- an evaluation of the current condition of each item in the inventory
- the realistic “adjusted age” of each asset, based on the initial useful life and the expected remaining life of each asset
- the estimated replacement cost of each asset.
- The inventory will remain relatively consistent from year to year unless an asset is eliminated or a new asset is purchased. On the other hand, the evaluation of an asset’s condition, the adjusted age, and the cost to replace or provide for major repair will change each year.
It is very important that a clear distinction be made between the private property of individual owners and the common area assets which are the association’s responsibility. The association documents will hopefully provide a clear definition of all real property ownership interests, but if they do not, it is the responsibility of the Specialist to clarify that information with the association’s Board of Directors prior to commencing work on the reserve study.
Financial Analysis
In preparing the Financial Analysis, the Reserve Specialist works from the information compiled in the Physical Property section described above in order to determine what the possible level of funds will be needed at various future points of time. Each asset has a different life expectancy, replacement cost, and age factor (such as rate of wear, quality of interim maintenance and servicing, and quality of the initial product installed); therefore, the financial analysis will be different for each asset component.
The Reserve Specialist compiles the individual financial schedules for each asset, usually through the use of sophisticated software, which takes into account the timing of the association’s reserve cash requirements. Such timing is based on all of the factors outlined under the Physical Property Analysis section above. By including these projected cash flow needs, along with the balance of reserve funds that the community has already accumulated, and any interest income from these savings, the reserve study is prepared. The ultimate cash flow need determines the level of annual reserve contributions to be made by each owner as part of their periodic association assessment payment.
Written by Tea Fant, The Management Trust – Northwest