Question 1

What is a reserve study?

Answer

A reserve study is a physical and financial analysis of the common area an association is required to maintain on a long-term basis. HOA's (and other common-interest developments) are required to have an on-site reserve study performed every three (3) years. Reserve studies provide specific disclosure documents which are part of a package the association is required to mail to membership annually. There are three levels of reserve studies: Level 1 is referred to as a Full Reserve Study, this includes an on-site inspection and full quantification of the reservable common area; Level 2 is an Update Reserve Study with site inspection, a Site Inspector may update component condition and cost estimates; Level 3 is a Financial Update Reserve Study and does not involve a site inspection, instead reserve expense information is accounted for, financial information updated, and fresh disclosure documents are provided.

Question 2

Are we talking about HOAs?

Answer

Yes I am! Homeowners associations, condominiums, townhomes, high-rises, master-planned communities, and other terms are all types of common-interest developments. The Davis Stirling Act in the California Civil Code governs common-interest developments. The reserve sections in the Davis Stirling Act state that reserve studies must be performed for most community associations. Reserve studies are also beneficial for timeshares, resorts, schools, churches, industrial parks, and commercial developments.

Question 3

Are reserve disclosure documents included with SCT reserve studies?

Answer

Every SCT reserve study includes the California Civil Code reserve disclosure documents for the annual mailling. These pages are titled 'Reserve Summary' and 'Assessment and Reserve Funding Disclosure Summary' and state their Civil Code requirement at the top of the pages. Do you have a blank line where the monthly assessment should go on the top of the Assessment and Reserve Funding Disclosure Summary page? Send us the upcoming approved budget, any changes to the reserve balance, reserve allocation, and components, and we will finalize the reserve study. We are more than happy to fill this in; however, when In a bind, one could fill in this line with the monthly dues and be ready for mailing. The annual disclosures must be send to membership 30-90 days before the fiscal year end.

Question 4

Are reserve studies required? If so, how often?

Answer

Most community associations are required to have reserve studies performed, the only exception is if the current replacement value of the major components is equal to or greater than one-half of the gross budget of the association, excluding the association’s reserve account for that period. Most communities don't come close to meeting this requirement, so read on to hear the details. An on-site reserve study is required by the Davis Stirling Act every 3 years. Level 1 & Level 2 Reserve Studies satisfy this requirement. Financial updates (Level 3 Reserve Study) are recommended for the years in between so your community’s expenses are accounted for and, more importantly, provide fresh reserve disclosure documents for the membership and potential buyers. Keep in mind that reserve studies should be prepared in advance of budget conversations for the upcoming fiscal year. If an HOA has a December 31 fiscal year end, May is not too soon to request proposals and get an on-site visit scheduled.

Question 5

What time of year should we (the HOA Board of Directors) have a reserve study done?

Answer

One of the most asked questions! The annual mailing must be sent to membership 30-90 days before the end of the community’s fiscal year, and the reserve disclosure documents should be included. Around 6 months prior to the end of the fiscal year is a good time for the board or community manager to start the reserve study. Here's the reserve study process: 1. Association requests reserve study bid 2. If association is new to us, we will request the most recent reserve study (or DRE Budget), an address, and a site map 3. Reserve provider sends bid. Association Board of Directors discusses and approves one reserve study provider. 4. Reserve provider is notified by community manager or board member. Reserve provider sends list of information needed to produce reserve study. 5. Community manager (or other management representation) or board member(s) provide information to reserve study provider. 6. If necessary, reserve provider reaches out with questions or concerns. Reserve study is produced and sent. Later in the year, as the fiscal year end nears, and the board is having budget conversations, find the reserve study. 7. When the budget is approved, send the upcoming budget to us, and let us know if there are any updates to the reserve balance, reserve allocation, and/or any unexpected component expenses. 8. We will finalize the reserve study and send it back, ready for your association's mailling.

Question 6

What will SCT need to provide a proposal?

Answer

We will need the community's most recent reserve study, site map, an address, and the number of units (if it's not clear in the reserve study).

Question 7

If a reserve component has a remaining useful life of 0, does this mean it must be done?

Answer

Absolutely NOT! A Reserve Study is a prediction of the assets in their current state. Often times components last longer than they are expected to, and sometimes don’t last as long as we hope. At the time of an on-site inspection (Level I or Level II), our site inspectors use their expertise to determine approximate life based on observation and any additional information provided by management or the board.

Question 8

The Board is discussing adding a tennis court where there is currently a large grass area. Is this considered a capital expenditure, or can we expense it from the reserve account?

Answer

While we are not attorneys (and one may be beneficial to consult), we consider all existing components reservable items. However, since both situations want to change an existing reserve component, this would not be a reasonable reserve expense. Funds can be raised through a special assessment, or other similar means. Operating budget/excess money???

Question 9

What projects can the Board pay from reserves?

Answer

All association reserve-able assets are outlined in the reserve study. In our reports, the component detail can be found in the Component Identification Report. Reserve expenses must meet some criteria: 1. Must be an association's common area maintenance item 2. Must have limited life 3. Must have predictable remaining life 4. Cost must be above minimum threshold Some reserve study guidelines are best discussed by the Board infrequently, but occassionally to understand and stay up-to-date with the reserve study. An example is to establish a minimum threshold for all reserve items. For small communities the threshold could be $500, and for large high-rises or master-planned communities closer to $1000 or $1500 are reasonable. There are other factors to take into consideration. There are, of course, exceptions.

Question 10

Is each line item a maximum that we, the Board, are allowed to spend?

Answer

Not the case! Each line item you see in the Component Identification Report is an estimate for its upcoming expense in an estimated amount of remaining years. In reality, if three bids were to be collected for the same scope, you would get three different prices. The maintenance may be more or less invasive, the materials available may be different, and other factors can affect the cost. When the Board (or a board member acting on behalf of the board) reviews the reserve study annually, actual bids and scopes of work can be developed and incorporated into the reserve study.

Question 11

We don't see a line item for the block walls (or plumbing, concrete, structure, etc), can I use reserve funds?

Answer

I have two follow up questions to this inquiry. How much is the expense? Are there more repairs of this nature needed, or will this solve the problem? Once an association encounters an issue that is not a typical reserve expense, we recommend adding it to the reserve study. The next time an issue arrises, we will already have the prior entry as a starting point.

Question 12

What financial documents are needed?

Answer

We will need the association's most recent month's Balance Sheet and Income Statement. We are keying into the reserve account on these two documents for the monthly reserve allocation and reserve balance. The reserve allocation is generally not difficult to determine. The reserve balance, however, is only a starting point to estimate the reserve balance at fiscal year end. To estimate this, we start with the month's balance as stated in the financials, add remaining months (before FYE) allocation, and subtract any known expenditures.

Question 13

Can the Board borrow from reserves?

Answer

We recommend you seek advise from your community manager and/or legal representation. Here are some general guidelines, keep in mind this may or may not apply to your specific situation. If a Board decides to cover short-term debt with reserve funds, the funds must be paid back within one (1) year.

Question 14

Percent Funded, what does it really mean?

Answer

Percent funded is a calculation to express how well funded an association is relative to the fully funded figure. If a community is fully funded (100% funded), then it has funded to the levels determined by the costs, full lives, and remaining lives identified in the Component Identification Report. In SCT reserve studies, the rightmost column on the Component Identification Report shows the fully funded amount for each component, category, and totals. 100% funded does not equal current cost. To be 100% funded does not mean that a community could afford to replace 100% of the common area tomorrow. Here's another way to think about it: To understand the whole, we break it down into pieces. It is really a math equation: (reserve balance)/(100% funded)*(1/100)= ___% First, we need to determine the estimated reserve balance at fiscal year end. Second, the Component Identification Report will identify the 100% funded value. Third, do the math!

Question 15

What does it mean to be over- or under-funded?

Question 16

Is there a difference between a Reserve Analyst/Consultant/Provider and a Reserve Specialist?

Answer

Yes, indeed! A Reserve Specialist is a special designation awarded to Reserve Analysts/Consultants after satisfying all requirements, and are deemed to ensure as accurate as possible reserve budgets. CAI offers educational opportunities for homeowners, board members, community managers, and business providers of the HOA industry.

Frequently Asked Questions

Reserve Basics