A reserve study is made up of two main components – a physical analysis of shared or ‘common property’ elements, and a financial analysis of the funds required to maintain, repair, or replace those property elements in the future.
The Two Main Components of a Reserve Study
Physical Analysis
The physical analysis is comprised of an inventory, an assessment of the condition, and estimates of the life and valuation of the components.
In order to prepare an accurate, customized reserve study, one of our inspectors visits the property and meets with the property manager and / or board members. The inspector gathers important background information on the property, and gives the property manager or board member a chance to outline any problems that they are having with the property.
Following the meeting, our inspector inspects the property, recording, measuring, and assessing the condition of common elements paying special attention to problem areas. The inspector also takes photos of the common elements to document their condition.
This physical analysis allows the inspector to estimate the expected, remaining life of these common elements, and recommend when replacements or repairs should need to take place.
Financial Analysis
Reserve Funding Methods
Two industry-accepted methods exist to calculate a reserve funding plan.
1. The Component (straight line) method.
2. The Cash Flow (pooling) method.
Both of these methods are approved and accepted by the Association of Professional Reserve Analysts and Community Associations Institute.
By dividing the replacement cost of each common element by the number of years before replacement, the component method finds the necessary annual funding amount for each common element. This causes annual reserve budgets to vary from year to year, and thus must be re-calculated each year. It can also result in higher than necessary reserve balances.
The cash flow method pools all projected replacement costs of common elements, and creates a funding plan that offsets the collective, future costs from the reserve fund. In our experience, we’ve found that the cash-flow method utilizes funds more efficiently, provides relatively stable levels of reserve funding, and yields more reasonable, realistic numbers for reserve contributions.
To find out more about our procedures for conducting reserve studies, or to be in touch with a reserve study specialist click here or give us a call at (800) 543-8670.
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