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