Reserve Study Updates

A reserve study provides a homeowner association with a 30 year schedule and funding plan for dealing with cyclical repairs, replacements and maintenance. It  is  one  of  the  most  indispensable weapons in a board’s arsenal.  While a reserve  study’s  components  and quantities may not change, the cost and useful life of each of those components often  does.    Costs  for  these  future events is impacted by forces which no one can control the dynamics of the real estate  market  (hot  or  cold),  the availability of qualified contractors and the price of oil in Iraq. These actors can swing from month to month.

Some states require that reserve studies be reviewed and revised each and every year.    But  regardless  of  the  legal requirement to do it, practical reasons abound.  Reserve  studies  are  30  year projections that are based in the most accurate  information  available  at  the time they are completed. But a reserve study’s  underlying  assumptions  are moving targets.   For the reserve study to remain useful, changing information must be updated even when no reserve related repairs have been done during a given  year.    These  key  elements  of every reserve study will change from year to year:

Starting  Balance  in  the  Reserve Fund.  Each  year,  contributions  are made to reserves. Interest is earned and added to the balance.  While there is a projection made each year on what next year’s  Starting  Balance  may  be,  the exact balance at the start of the coming year will always be somewhat different. Since  the  Starting  Balance  sets  the stage  for  future  contributions,  it’s critical that it be accurate.

Reserve Fund Interest Yield.   Even if reserve  funds  are  invested  as  they should be, the return on investment will vary  from  year  to  year.    Interest earnings have a profound effect on the 30  year  projection  period  of  most reserve studies.  Interest can amount to tens of thousands of dollars over that time.  Interest earnings reduce owner contributions.

Inflation  Rate.  Inflation  varies depending on how the Federal Reserve Board feels, OPEC oil price rigging and the  effects  of  global  climate  change. Like  Interest  Yield,  compounding inflation  has  a  dramatic  impact  on future  costs.    Inflation  is  how  future costs  are  predicted  so  using  the  most recent  inflation  factor  available  is critical to those predictions.

Known  Cost  Changes.    Each component’s  predicted  cost  should  be examined.  For example, if the current price of roofing goes up 15%, so should the replacement cost of the roof in the reserve study.

Site  Inspection  Updates.    A  key component of keeping a reserve study accurate  is  periodic  site  inspections. Site inspections allow the reserve study provider  to  visually  inspect  the components for condition to ensure that they  are  aging  as  predicted.  For example, does that 30 year roof, now 10 years old still have 20 years of useful life  left?    Site  inspection  updates  are recommended every three years.

So, if your homeowner association has a reserve study (and it certainly should), you need to review and revise it every year.

Used with permission from Richard Thompson of www.Regenesis.net

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