Re: Reserve Studies
From: Douglas G. Larson (ddhleearthlink.net)
Date: Thu, 29 Dec 2011 09:03:14 -0800 (PST)
 

>  We have never done a Reserve Study.  As the liaison with this List, I
have forwarded a lot of the e-conversation about it to my neighbor on our
Long Term Planning Committee.  Would someone please > 
>  send a definition of what it is? And how it is worth the expense.  Part
of her response is below.


Here are the basics about Reserve Studies and Reserve Funds for Homeowner's
Associations. 

Reserves are funds set aside by a Homeowner's Association to be prepared for
the eventual replacement of assets. Those assets are very broad and can be
big ticket items like roofs, driveways or painting (both interior and
exterior) but can also be smaller items like fences, landscaping, decks,
common house dishwashers, ovens or refrigerators. There generally is a lower
dollar limit below which an asset is NOT included in the reserve study.
Hence things like toasters, coffee makers, food processors are generally not
included. The professional Reserve Study organization can guide you on where
that dollar limit is. 

Reserve funds are collected regularly, usually via your regular monthly
Homeowner's Association dues, to build up the fund for the future
replacement of these assets.

A Reserve Study, is a study done by professional organization that has
experience with and knowledge of Homeowner's Associations financial standing
as well as experience with the expected life of common capital assets, like
those I mentioned above. They usually do a detailed initial study and then
less detailed follow-up studies every 3 years or so. The initial study
involves them coming to your site and looking at all assets in question. The
follow-up studies are done to make sure that each asset appears to be about
where you thought it was in its expected life-span as well as updating costs
for each asset as market prices change and allowing for inflation. I am not
sure if follow-up studies require a site visit since our community hasn't
had its first follow-up yet. 

Total Reserve Funds for an HOA need not be a sum of the value of all assets.
That would be prohibitive and usually isn't necessary. Usually it's a
percentage of the total and is designed to cover replacement expenses as
they occur. Each asset has a different life span and the professional
organization you hire can help you with numbers and with deciding where you
are and where you want to be. 

Also Reserve Funds are NOT for Capital Improvements, i.e. for building or
purchasing assets not previously present in the community (e.g. a New
Greenhouse, a New additional refrigerator). You would use other financial
assessment methods to acquire those assets. Once they were acquired,
however, they would be added to the total list of assets to be managed with
Reserve Funds. 

Likewise Reserve Funds are NOT for replacement of assets in the event of
catastrophic events (e.g. Storms, Fire). Typically your insurance covers
assets that expire under those conditions. 


The purpose of the Reserve Study is so that you have some sound basis for 
  a) The expected life-span of each asset
  b) That you are collecting adequate funds to cover each asset replacement
in the year expected.
  C) A schedule of how much to collect each year overall and from each
owner.
  

Most state laws require Homeowner's Associations to have and collect Reserve
Funds. I have heard shocking statistics that many Homeowner's Associations
have inadequate funds and/or inadequate collection rates but I don't recall
precise numbers. 

What I can tell you is hiring a professional organization to do the Reserve
Study is money well spent. 

In addition to the reserve study itself, it would be beneficial to give
serious thought to how manage the reserve funds. That is, in any given year,
if an asset is due for replacement, the following questions are germane:

  a)  Who (or what committee) is authorized to decide to spend the funds?
  b)  Can the authorized person(s) spend the money without community
approval?
  C)  When can or should the funds be spent? Some assets will last longer
than expected and others shorter than expected. How much time before or
after the scheduled year, can the money be used?

Our community is working on this Reserve Fund Spending Model now. It isn't
complete yet but we are almost done with it. If you are interested in it,
let me know and I can send it to you directly. 




I hope this helps. 


Douglas Larson,
Songaia Cohousing,
Bothell, Washington














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