RESERVE FUNDING
community consists of past, present, and future homeowners, and the financial burden of maintaining the association should be distributed equitably among these three groups. • Sound financial planning. Funding for eventual replacement of the common components should be part of every annual budget. If the reserve funding is not properly planned, special assessments or borrowing will be needed. • Fiduciary duty. The board has a legal and fiduciary responsibility to homeowners. By not including reserve funding in the association’s annual budget, board members are not demon- strating prudent judgment and sound business practices. Failure to adequately plan for
reserve obligations may expose the board to claims alleging breach of fidu- ciary duty.
RESERVE STUDY: A reserve study is a bud- get planning tool identifying the compo- nents a community association is responsi- ble to maintain or replace, the current status of the reserve fund, and a stable and equita- ble funding plan to offset anticipated future major common area expenditures. This limited evaluation is conducted for budget and cash flow purposes. Tasks outside the scope of a reserve study include design review, construction evaluation, intrusive or destructive testing, preventive maintenance plans, and structural or safety evaluations.
WHAT IS A RESERVE STUDY? While associations have long recognized the need to set aside funds for future capital expenses, uniform guidance on how to con- duct and evaluate reserve studies did not emerge until the late 1990s with the publication of Reserve Study Standards and the accom- panying Explanation of CAI’s Reserve Study Standards. At its core, the concept of a reserve study is straightforward: estimate the cost of replac- ing a component and spread that cost over its
useful life. However, applying this concept in practice is more complex. Most associations are respon- sible for multiple components such as roofs, paving, mechanical systems, and amenities. Each of these components has a different replacement cost, expected lifespan, and maintenance history. The process becomes even more complex when the association has multiple components of varying ages. In these cases, the reserve study professional must evaluate the current condition of each asset, estimate its remaining useful life, and adjust funding recommendations accordingly. This combination of physical assessment and financial forecasting is what transforms a reserve study from a basic budgeting exercise into a critical planning document. Reserve Example: If an association has one component that will cost $100,000 to replace in 20 years, the associ- ation should set aside $5,000 per year for 20 years to accumulate the money needed to replace the component. This analysis requires knowledge of cost estimating and the economic life of the component. It will need to be updated regularly to account for changes in condition or estimated remaining useful life and inflation.
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