What is a reserve study?
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.
Are we talking about HOAs?
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.
Are reserve disclosure documents included with SCT reserve studies?
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.
Are reserve studies required? If so, how often?
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.
What time of year should we (the HOA Board of Directors) have a reserve study done?
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.
What will SCT need to provide a proposal?
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).
If a reserve component has a remaining useful life of 0, does this mean it must be done?
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.
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?
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???
What projects can the Board pay from reserves?
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.
Is each line item a maximum that we, the Board, are allowed to spend?
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.
We don't see a line item for the block walls (or plumbing, concrete, structure, etc), can I use reserve funds?
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?
Reserve Study Funding
What financial documents are needed?
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.
Can the Board borrow from reserves?
We recommend you seek advise from your community manager and/or legal representation.
Percent Funded, what does it really mean?
Percent funded is a calculation to express how well funded an association is relative to the fully funded figure.
What does it mean to be over- or under-funded?
Is there a difference between a Reserve Analyst/Consultant/Provider and a Reserve Specialist?
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.