HOA Reserve Study Basics for Board Members

What a reserve study is

A reserve study is a long-range plan for replacing the association's major shared components. It has two parts: a physical analysis of what the community owns and the condition it is in, and a financial analysis of whether current savings and contributions will cover the future costs.

In parts of Canada the same kind of document is called a reserve fund study or a depreciation report. The name changes, but the idea is the same.

It is a budgeting tool, not a repair order and not a structural inspection. A reserve provider looks at components to estimate their remaining life. If the study or a site visit raises a safety or structural concern, that needs a separate review by a qualified engineer.

What is inside the report

Most reserve studies contain the same core pieces, whatever the provider's layout. Knowing them lets you find the numbers that matter quickly.

• Component inventory: the list of items the reserve fund pays for, such as roofing, paving, fencing, pool equipment, elevators, exterior paint, and mechanical systems
• Useful life: how long each component normally lasts
• Remaining useful life: how many years this particular component has left, given its age and condition
• Current replacement cost: what it would cost to replace today
• Fund status: the reserve balance compared with the ideal balance at this point, usually shown as percent funded
• Funding plan: recommended annual contributions for a long period, commonly a few decades, with the projected balance each year
• Assumptions: the inflation rate and interest rate the projections rely on

What usually counts as a reserve component

Providers commonly include an item when it is the association's responsibility, has a limited and predictable life, and costs enough that it cannot be absorbed in the operating budget. Small, annual items such as routine landscaping stay in operating. Your governing documents decide what the association is responsible for, so give the provider the maintenance responsibility sections.

Types of reserve study

There are generally three levels, and the right one depends on how recent and reliable your last study is.

• Full study: the provider measures and counts every component on site and builds the inventory from scratch. This is what a community needs the first time, or when the old study cannot be trusted.
• Update with a site visit: the provider starts from the existing inventory, inspects condition on site, and refreshes lives, costs, and the funding plan.
• Update without a site visit: a desk refresh of costs, balances, and the funding plan, using the existing inventory and condition information.

Some states and provinces require reserve studies and set how often they must be done or updated. Others leave it to the governing documents. Check the rule for your jurisdiction, and treat any legal minimum as a floor. After a major project, a large cost change, or storm damage, an early update is sensible.

How to hire a reserve study provider

Ask for proposals from more than one provider, give each the same information, and compare scope before price. A cheaper study that skips the site visit or leaves out components is not a saving.

What to give the providers

• Governing documents, especially the sections on what the association maintains
• Site plan, unit count, and age of the community
• The previous reserve study, if any
• Current reserve balance and annual reserve contribution
• History of major projects, with dates and costs, and any bids in hand

Questions to ask

1. What credentials and experience do the people doing the work have, and have they worked on communities like ours?
2. Which level of study are you proposing, and does it include a site visit?
3. Where do your cost figures come from, and do you use local pricing?
4. What inflation and interest assumptions will you use, and can we see the effect of changing them?
5. Will the report show more than one funding option?
6. Does the fee include a draft review, revisions, and a meeting with the board?
7. Does the report meet any content or disclosure requirements in our state or province?

The vendor management guide has a general process for comparing proposals and checking insurance that applies here too.

How to read percent funded

Percent funded compares what the reserve fund holds with what it would ideally hold given how far each component is through its life. It is a snapshot of the fund's strength on the study date.

A worked example with made-up numbers

Suppose a roof costs 100,000 to replace and lasts 20 years, and it is now 10 years old. Half its life is used, so the ideal amount saved for the roof today is 50,000. Do that sum for every component and add the results to get the fully funded balance. If the fully funded balance for the whole community is 400,000 and the fund actually holds 200,000, the association is 50 percent funded. These figures are only an illustration.

• A higher percentage means less risk of a special assessment or a loan when a big item comes due
• A lower percentage means more of each future replacement will have to come from new money
• The trend matters more than any single year. A fund that rises steadily toward the target is healthier than one that is higher today but falling
• Lenders, buyers, and in some places disclosure rules pay attention to this figure

Providers often describe broad bands of weak, fair, and strong funding. Treat those as rules of thumb and look at the year by year projection as well, because a fund can look acceptable today and still run short in the year three large items fall due together.

How to read the funding plan

The funding plan is the part the board acts on. It shows the recommended reserve contribution for each future year and the balance that results.

1. Find the recommended contribution for next year and compare it with what you contribute now. The gap is the decision in front of you.
2. Scan the projected year end balances. Look for the lowest point and the year it occurs. A balance that goes negative or close to zero marks a likely special assessment.
3. Look at the expenditure schedule for the next five years. These are the projects to start planning and bidding.
4. Check the assumptions. A plan built on low inflation will understate future costs.
5. If the recommended increase is too steep for one year, ask the provider to model a stepped increase over several years and show what that does to the low point.

You can test simple what-if figures with the reserve funding calculator, and see the effect on each owner's payment with the HOA dues calculator. Use the provider's model for the real decision.

What the board does after the study arrives

• Review the draft carefully. Correct wrong quantities, missing components, and projects already completed before the report is final.
• Formally accept the study at a board meeting and record it in the minutes.
• Carry the chosen reserve contribution into the annual budget as a fixed line.
• Tell owners in plain terms what the study found and what the board decided. Make the study available to owners in the way your documents and law require.
• Add the next five years of projects to the maintenance and capital plan.
• Put the next update date in the board calendar.
• Store the study with the permanent records so the next board and resale disclosures can use it.

If the study shows a shortfall that contributions alone cannot close in time, the board's usual options are a phased dues increase, a special assessment, a loan, or some mix. The special assessments guide and the capital improvement projects guide cover those paths.

Next step: find your most recent study and check its date, its percent funded figure, and the recommended contribution against your current budget. If you would like reserve components, balances, and contributions tracked alongside your dues and budget, see what hoa.to includes on the pricing page.

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