COMMON QUESTIONS

What is a Reserve Study?

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The reserve study is a budget planning tool which identifies the current status of the reserve fund and recommends a stable and equitable funding plan to offset the expected future major common area expenditures. The reserve study consists of the following steps:

• Component Analysis: This involves a visual inspection of the association reserve components to quantify and determine condition levels.
  
  
• Financial Analysis: During this step of the reserve study the reserve analyst analyzes the current financial health of the association, pertaining to the reserve balance(s) as well as current reserve contribution rates, interest rates, etc.

• Financial Plan: The expected component costs and reserve balance(s) are taken into account and analyzed to determine an adequate reserve contribution rate over the life of the study.

The completed reserve study is a culmination of the above steps to provide a clear and well thought out financial plan to help the association become fully funded. [TOP]

How does a Reserve Study Benefit the Association & Members?

Your association and members will benefit from a professional reserve study as this financial plan will guide the association in a financially responsible direction. Below are the common advantages of having a reserve study performed:

• Funds are available to make repairs and replacements when needed, thus helping to avoid special assessments.
  
• The current and future owners equally share in the repair and replacement costs.  In other words, the owners are paying for the use of the common elements during their tenure.
  
• The marketability of units or shares is preserved.
  
• Provides an inventory of common area components and a schedule for their repair and replacement

The lack of reserves or inadequate funding have significant disadvantages including the following:

• It may adversely affect the ability of unit owners to sell because of concerns that a prospective buyer may have.
  
• It may adversely affect the unit owner's ability to refinance because lending restrictions.
  
• A lack of adequate funding may require the board to levy special assessments to fund for predictable component expenditures. [TOP]

Why have a professional reserve company complete the study?

We recommend a professional reserve study be completed by one of our reserve analyst. We have the experience and independence that is typically lacking with board members or association managers who have personal interest in contribution rates and project expenses. An unbiased report will provide the association with a clear and accurate picture of the current financial health of the association and provide a well defined path in which the association can follow. [TOP]

Are there industry standards for Reserve Studies?

Yes, the Community Associations Institute publishes the National Reserve Study Standards which lists the below minimum content to be included in a Reserve Study:

• A summary of the association's number of units, physical description, and reserve fund financial condition.
• A projection of reserve fund starting balance, recommended reserve contributions, projected reserve expenses, and projected ending reserve fund balance for a minimum of 20 years.
• A tabular listing of the component inventory, component quantity or identifying descriptions, useful life, remaining useful life, and current replacement cost of each element.
• A description of the methods and objectives utilized in computation of the fund status and development of the funding plan.
• Source(s) utilized to obtain component repair or replacement cost estimates.
• A description of the level of service by which the reserve study is prepared.
• The fiscal year for which the reserve study is prepared.
• Our Reserve Studies comply with WA State RCW requirements outlined here: RCW 64.34.382 - Reserve Study Contents [TOP]

How often should a Reserve Study be performed?

Washington State regulations require that a full reserve study or update with site inspection be performed every three years. On the first and second years after a Level I or II Study is completed , a Level III Update with no site inspection is required. Below are the Reserve Study Levels:

• Level I Reserve Studies require an onsite inspection of the components.

• Level II Reserve Studies are considered updates to the full study with a site inspection. We recommend this level of reserve study for the years that a full reserve study is not required.

• Level III Reserve Studies are updates to the full study with no site inspection. Components are not visually inspected and condition levels are based solely on past condition ratings and are not verified. This level of study meets the Washington State requirements for the annual update but is considered to be less accurate and less reliable as the Reserve Analyst relies on condition ratings and the component list from prior full study. It has been our experience that an update with site inspection is considered to be more accurate and a better product which Associations can rely on. [TOP]

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How much will the reserve study cost?

The cost of a reserve study will depend on numerous factors including but not limited to:

• Level of Service Requested (Level I, II, or III)
  
• Size of the Association
  
• The number of components
  
• Age of the Project
  
• Location of the Project

Please feel free to submit a Request for Proposal​, to obtain a quote for a reserve study for your association. [TOP]

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What components are included in a Reserve Study?

A common concern among Association Managers and Members is what components are to be included in the Reserve Study. We have a process for determining which components will be included in the study for repair and replacement. The component should meet the following criteria:

• The component is community owned and maintained.
• The component is not covered in a maintenance contract.
• The component is not included in another part of the budget.
• The component has a limited life expectancy.
• The component has a reasonably defined life.
• The cost is above the minimum association expense threshold.

We have found the above criteria cover the vast majority of components but there can be exceptions, such as components which are not clearly recorded in the governing documents. [TOP]

How can component life expectancies be predicted?

A reserve analyst estimated the condition level of components, remaining economic life and the general useful life of each component. Estimations and averages are utilized based on similar components life expectancies taken from our experience, vendor interviews and national costs handbooks. While this is the best we are able to offer, actual life expectancies may vary, sometimes substantially, due to items such as:

• Maintenance History
  
• Quality of Workmanship and Materials
  
• Use Patterns
  
• Unexpected Mechanical Failure

When a component fails prematurely it will affect the projected expenses and contribution rates that are set out in the report. It is suggested that the report be updated annually so that actual expenses and contributions can be updated in the reserve study. [TOP]​

How are inflation and interest rates predicted?

Inflation rates and interest rates have a substantial affect on projected costs and reserve balances. This is most noticeable for components which have longer useful life expectancies and have many years of inflation before they are expected to require replacement. A reserve balance for the cost of the replacement today will be severely underfunded for the actual cost 20-30 years down the road.

The best indicators we have for both inflation and interest rates are historical averages. These rates will fluctuate from these averages, as they have in the past, but typically will average out near these assumptions as they have done historically. By updating the Reserve Study annually consideration can be given to substantial deviations from the inflation or interest rates if they appear to be long term scenarios. [TOP]

How long will it take to complete the Reserve Study?

In order to provide the most accurate assessment possible, we conduct an on-site visual inspection of the capital equipment components and determine the current condition levels and estimated remaining useful life. After our onsite visual inspection and interviews of parties (owner, employees, vendors, etc.) the report will typically be completed within 30 days. [TOP]

What Reserve Funding Method does Reserve Data Analyst use?

The two most widely used and accepted reserve funding plans are the Component Method and the Cash Flow Method. Both methods are approved by the Community Associations Institute.

• The Component Method divides the current replacement cost of each reserve component by the number of years before replacement (remaining life) to arrive at the necessary annual funding amount for each common element. The component method results in annual reserve budgets which vary from year to year. As such, the annual funding amount must be recalculated each year to keep updated and in line with a fully funded goal. Component method reserve funding is a more conservative approach and results in larger balances which can cover unexpected expenses minimizing reliance on special assessments.

• The Cash Flow Method pools all of the future replacement costs of the common elements and determines a funding plan that is designed to offset the collective (or pooled) future costs from the reserve fund. This method often minimizes contribution rates but when there is an unexpected component failure the reserve balances can result in a shortfall and the reliance on special assessments is greater.

Reserve Data Analyst takes into consideration both the Component Method and Cash Flow Method in coming to a catered reserve study for each of our clients. We feel this flexibility is a greater service to our clients and their specific long term goals. [TOP]

​Are taxes on estimated interest earned, from the Reserve Account, included in the Reserve Study?

We do not typically include tax liabilities in our Reserve Studies​ as we have found most associations use their annual operations budget for this expense, however, we are able to accommodate associations which request this expense be included in their reserve funding plan.

Most governing documents and state statutes specifically state which items are to be paid for with reserve funds, typically this includes only major repair or replacement of common area components. There is rarely mention of tax liabilities generated from the reserve account itself. Then the question becomes; how are governing documents and state statutes interpreted? We suggest the Association consult with its legal counsel to determine how the Association will interpret its governing documents and the local state statues in regards to this issue.

The reserve fund often generates the most interest for an Association and there may be a tax liability on this income. It is important that the Association also consult with their Accountant to determine what the tax liability would likely be. Proper planning for this expense would be appropriate for the Association as the interest income earned can be substantial.  [TOP]

Can Reserve Data Analyst help with disclosure requirements to comply with RCW 64.34.308?

Yes, Board disclosure requirements to community members is outlined in RCW 64.34.308 linked here: WA State RCW 64.34.308 .  We can create a disclosure document which requires information taken from our Reserve Study as well as adopted budget figures. Please fill out the following form once the budge has been adopted so that we may help in you supplying the required information to your community members:  Request for Disclosure Form        [TOP]

Can Reserve Data Analyst present the findings and reserve strategy to the Board?

Yes, our reserve study professionals can provide a presentation of the reserve study and our recommendations in person at meetings, via a recorded video summary or live streaming video meetings upon request.  [TOP]

Written by Joel L Tax - Professional Reserve Analyst - 03/01/2016