What is a Reserve Study – Simple Terms
In the simplest terms, a reserve study is a budgeting tool that allows property owners to determine if they are currently reserving enough money to cover future expenditures (roofing, painting, etc.).
Reserve Study – Financial Snapshot
The reserve study is a financial snapshot mostly for homeowners’ associations (HOA), where owners share common area components, but can be utilized on any type of property. This snapshot also helps owners set fees to ensure all future repair expenses will be taken care of during the life of the property.
Reserve Study – Analyze Components
The reserve study analyzes components’ service lives and costs to project future repairs and replacements; and reviews current reserves and contributions to develop a current funding plan. This funding plan is simply a cash flow analysis. As a business operation, the property collects revenue or contributions and incurs replacement expenses; the remaining monetary result is a net balance. Our goal is to keep this net balance above zero over a twenty or thirty year period. However, many times the expenses are greater than the reserves and the challenge is developing a funding plan the owners can realistically adopt. For some clients, the challenge is not keeping the net balance above zero, but rather determining what level of funding reserves, otherwise known as percent funding, they feel to be adequate. We specialize in designing a funding plan specific to your needs to address whatever your strategy may be.
Reserve Study – Forecast of expected outcomes
It’s important to remember that a budgeting process is just as much an art as it is a science, and to not lose sight of the big picture. Remember: the reserve study is to be used like a forecast of expected outcomes to ensure funds have been set aside after taking into account financial assumptions, such as rates of inflation, interest, and contributions. It is impossible for any person to tell what will happen tomorrow, let alone twenty years, and that is why it is important to review the reserve study as part of your annual budget process.
Read more: Reserve Study according to California Law
At Barrera and Company, we complete thousands of Reserve Studies each year which have helped our clients comply with the law and prepare for upcoming expenditures.
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