The Reserve Study Explained
A reserve study is a budget planning tool for the Board of Directors of a common interest association to use. This budgeting tool identifies the current financial condition and ability to fund long term major projects of the community. It provides a stable and equitable funding plan to offset ongoing deterioration of the association components. Proper use of this tool results in making sufficient funds available, without a special assessment, when those anticipated major expenditures actually occur.
The reserve study consists of two parts:
- The physical analysis with a site visit by the reserve specialist.
- A financial analysis with information provided by management.
The reserve study is best prepared by a "reserve study specialist", an objective independent third party consultant/expert. Reserve studies are done for all types of common interest communities, they can be created for properties such as condos, SFD HOAs, master planned SFD communities, commercial condo associations, worship facilities, private schools, private golf clubs and more.
As reserves provide funding for long term major repair and replacement for projects of the community. Such projects would include: replacement of the roof on the building(s), window replacement, siding replacement, concrete replacement, perimeter walls, entry monuments, swiming pools, retrofit and modernization of the fire alarm systems, and resurfacing of the roadways. Plus much more, depending on the community and the governing documents.
In Summary: Adequately funding the Reserve Account protects and maintains the physical assets in the community fairly. This also protects and maintains the investment that each owner has made purchasing their property. The Reserve Study does this by making sure that funds are available to replace worn out components on a timely basis while avoiding the need for special assessments.
Fiduciary Duty: Per Texas laws, the association’s Board of Directors have the same legal fiduciary responsibility to their association members as does any corporate Director. As a corporation, community association Board members are held to the same standard of duty by which any corporate director is measured. When considering reserve funding, ignoring a large and important part of the association’s annual budget will not meet the standard of judgment applied here, and therefore Board Members could be held liable for their failure to act, as a Breach of Fiduciary Duty.
Funding fairly is also one of the primary reasons for a reserve study. A reserve study calculates what each owner pay as their equal share of the deprieciation of the usefull life of a component as it is being used. So, if someone lives in a community with 100 homes for 5 years, and that community has a major component worth $10,000.00 that needs replacement every 10 years. Funding replacement would require $1,000.00 per year. Divided by 100 owners would be $10.00 per home per year. A person living in the community for only five years would need to pay his share of $50.00 for his use of the expected component life. This way, it is a pay as you go. It does not leave huge expence for the new person coming into the community.