What’s a Reserve Study?

By February 17, 2012Blog, Uncategorized

 A Reserve Study is a budget planning tool which identifies the current status of the Reserve fund and a stable and equitable Funding Plan to offset the anticipated future major common area expenditures.

The Reserve Study consists of two parts: the Physical Analysis and the Financial Analysis. This document is often prepared by an outside independent consultant for the benefit of administrators (Board of Directors) of a property with multiple owners, such as a condominium association or Homeowners’ association (HOA), containing an assessment of the state of the commonly owned property components as determined by the particular association’s CC&Rs and bylaws. Reserve Studies however are not limited only to condominiums and can be created for other properties such as resort (shared vacation ownership) properties, apartment buildings, and office parks.[1]

Reserve Studies are in essence planning tools designed to help the Board anticipate, and prepare for, the property’s major repair and replacement projects. California law requires HOAs to have a physical inspection done every three years and complete an Assessment and Reserve Funding Disclosure (ARFD) each year based on a Level3 or Financial Update.

Read More: Reserve Studies and California Law

Purpose

The purpose of the Reserve Study is to give those overseeing the maintenance of the property a better idea of what major expenses to expect and an educated estimate of when these expenses will occur. With this knowledge the Homeowner’s Association or property manager can create a more effective budget which also helps them to determine an appropriate amount of dues to charge each homeowner monthly to put towards reserves savings, and make accurate disclosures about the status of the Reserve Fund to homeowners.

Results

There are three results from a Reserve Study. 1) A listing of the major assets of the association to be funded through Reserves, their expected Useful Life, Remaining Useful Life, and Current Replacement Cost. 2) An evaluation of the current strength of the Reserve Fund (commonly expressed as “Percent Funded”). 3) A recommended multi-yr Reserve Funding Plan.

Relevance

Reserve Studies are required more often in recent years by HOAs and Boards of Trustees for due diligence, budget and planning purposes. An increasing numbers of U.S. states today requires Reserve Studies. Fannie Mae and the Federal Housing Administration also now require Reserve Studies in order for development projects to be approved for FHA insured loans and Fannie Mae lending products and services.

State Reserve Studies

In addition to being helpful planning tools, Reserve Studies for Community Associations are legally mandated in 25 states (such as California, Florida, Hawaii, Nevada, Virginia, Washington, etc.), either for budget preparation or homeowner (and prospective homeowner) disclosure purposes. In California, the relevant law is California Civil Code 1365.[2] In California, the law requires an annual Reserve Study Update, with that update prepared on the basis of a “diligent visual site inspection” at least every third year. With the passing of SB 278 in 2010, the state of Utah now also requires condominium and community associations to conduct and review reserve studies on a periodic basis.[3] Reserve contributions are often one of an association’s largest budget line items (often 15-40% of the total budget), and the Reserve Fund is typically the association’s largest financial asset. This means annual review of Reserve contributions and annual disclosure of the status of the Reserve Fund are prudent.

FHA Reserve Studies

On June 30, 2011 the Department of Housing and Urban Development published Mortgagee Letter 2011-22 which made Reserve Studies mandatory for all new condominium conversions applying for FHA insured loans approval, including gut and non-gut rehabilitation conversions. This new guideline went into effect September 1, 2011. Condominiums that fail to submit a compliant, recent and accurate Reserve Study, the development must add a budget Reserve line item in its budget equal to 10% of the yearly assessment income. The FHA enforces the 10% budget line item requirement nationally by prohibiting lending in developments that are non-compliant with this requirement. [4] Additionally, Mortgagee Letter 2011-22 stipulates all other condominiums requesting FHA project approval may be required to submit a current (completed within the last 24 months) Reserve Study at their discretion or whenever financial documents do not appear to meet sufficient funding requirements of the condominium association.[5]

Fannie Mae Reserve Studies

On December 1, 2010 Fannie Mae published Announcement SEL 2010-16. The new guidelines outlined in the announcement went into effect March 1, 2011. The guidelines made Reserve Studies mandatory for all newly converted, non-gut rehabilitation condominium developments to be eligible Fannie Mae project approval. [6] All other types of condominiums have the option to submit a compliant Reserve Study or must add a budget line item for Reserves equal to 10% of the yearly assessment income.

Barrera & Company

We complete thousands of Reserve Studies each year which have helped our clients comply with the law and prepare for upcoming expenditures.

Interested in getting a Reserve Study for your community? Click here to get a proposal!

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