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WHAT IS A RESERVE STUDY?

A reserve study is a projection of long-term homeowner association expenses and reserves in order to determine reserve fund status and develop a reserve funding plan.  

The annual budget for most associations is actually comprised of two separate budgets added together:

An "Operating Budget" consisting of routine annual operating expenses such as insurance, landscaping, utilities, management fees, etc.  Capital expenses are usually not included in the operating budget unless they're small expense items.

A "Reserve Budget" consisting of capital replacement expenses such as roofs, streets, pools, tennis courts, etc. A reserve study is the preparation of the reserve budget.  

Because the reserve budget usually involves projecting large expense items over a long period of time (a 30-year analysis period is required in the State of California), an inaccurate  reserve budget has considerably more potential to trigger unpleasant special assessments than a poorly conceived operating budget. Hence the need to diligently prepare a detailed reserve study.

There are two general steps in preparing a reserve study: 

ü      Physical Analysis.  Develop an inventory of association reserve components such as roofing, painting, and paving.   The condition of each reserve component must then be evaluated in order to estimate remaining life and replacement cost. 

ü      Financial Analysis.  Cash flow analysis showing long-term expenses versus reserves is the most common analysis method.  Reserve cash flow projections take into account inflation and interest rates.  California law requires analysis of projected reserve costs and revenues for the next 30 years.  

The result is a funding plan and a reserve fund status.

 

Funding Plan:  Once the reserve study has been prepared, the annual reserve funding recommendation taken from the reserve study is shown as a line-item in your annual budget.  The primary goal of the reserve study is to determine that single budget line-item.  This line-item is usually referred to in most budgets as "Reserve Allocation" or "Reserve Transfers."  Most associations set up a monthly transfer representing the recommended monthly reserve funding from their operating checking account to their reserve account.

Reserve Fund Status:  The reserve study also provides a measure of reserve fund status, otherwise known as the "Percent-Funded Estimate."  The Percent-Funded Estimate is a measure of the strength of reserve funds relative to depreciation of reserve assets.

To view samples of a reserve study, click here: Sample Reserve Study.

Stone Mountain Corporation reserve studies comply with the following:

ü      Community Association Institute's National Reserve Study Standards.

ü      California Civil Code 1365 and 1365.5

 

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Do you have further questions about Reserve Studies?    
Email  smc@west.net  or  ( 805-681-1575 x 22


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