Effective reserve planning helps community associations prepare for major repairs and replacements, protect shared assets, and make informed financial decisions. The Foundation’s updated 2026 Best Practices: Reserve Funding report offers practical guidance for boards, managers, and other community association professionals.
Reserve Funding BEST PRACTICES
Effective reserve planning and funding are essential to the long-term financial health, safety, and stability of community associations. This report highlights:
Reserve Study Preparation & Review Federal & State Requirements Communicating Reserve Funding Needs Trends in Reserve Funding & Management
BEST PRACTICES Reserve Funding Effective reserve planning and funding are essential to the long-term financial health, safety, and stability of community associations. This report highlights: • Reserve Study Preparation & Review • Federal & State Requirements
• Communicating Reserve Funding Needs • Trends in Reserve Funding & Management
SUPPORT NEW RESEARCH. Make a tax-deductible donation today.
ACKNOWLEDGEMENTS The Foundation gratefully acknowledges the contributions of the task force members who developed and updated this material: 2026 Task Force Contributors
Task Force Chair Michelle Baldry, rs , Reserve Advisors, llc , Arlington, Va. Robert W. Browning, pcam , rs , Browning Reserve Group, Carmichael, Calif. Patrick Costello, esq ., Costello Sury & Rooney, Oakbrook Terrace, Ill. Richard B. Emery, rs , Associa Hawaii, Honolulu Mitchell Frumkin, pe , rs , Kipcon, North Brunswick, N.J. Co-Lee Grev, ams , pcam , rs , Association Reserves, Eaton, Ohio Robert J. Koop, cmca , ams , pcam , RTI/Community Management Associates, Plano, Texas Joyce Sachs, 1219 W. Wynnewood Condominium Association, Wynnewood, Pa. Patricia Staebler, rs , Staebler Consulting, Bradenton, Fla. Orest Tomaselli, Strategic Inspections, Port Washington, N.Y. Past Contributors Robert W. Browning, pcam , rs , Browning Reserve Group, Carmichael, Calif. Mitchell Frumkin, pe , rs , Kipcon, North Brunswick, N.J. Sandra Matteson-Pierson, lsm , pcam , Jupiter, Fla. Peter B. Miller, rs , Miller-Dodson Associates, Annapolis, Md. Robert Nordlund, rs , Association Reserves, Westlake Village, Calif.
John P. Poehlmann, Milwaukee Theodore J. Salgado, Milwaukee Research Committee Chair
Marc Tamres, Homerun IQ, San Francisco Foundation President, 2026-2027 Ursula Burgess, esq ., CCAL Fellow, Rees Broome, P.C., Tysons Corner, Va. Staff
Dawn M. Bauman, cae , chief executive officer, Community Associations Institute, Falls Church, Va. Jake Gold, cae , executive director, Foundation for Community Association Research, Falls Church, Va. Samia Galani, coordinator, Foundation for Community Association Research, Falls Church, Va. Daniel Brannigan, senior director of publishing, Community Associations Institute, Falls Church, Va. Cori Canady, vice president of communications, marketing & creative, Community Associations Institute, Falls Church, Va. Joni Lucas, editor, Community Associations Institute, Falls Church, Va. The Foundation for Community Association Research is a nonprofit affiliate of Community Associations Institute, the professional organization representing those who manage, govern, advise, and live in 375,000 common interest com- munities throughout the United States. The Foundation’s mission is to provide authoritative and reliable research and reports on the operations of the common interest community industry and its community associations. This document is intended to provide reliable information regarding the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, risk management, or other professional services. Readers should consult qualified professionals for appropriate advice on relevant matters.
Copyright and Use Permission © Copyright 2026 Foundation for Community Association Research 6402 Arlington Blvd., Suite 500 Falls Church, Va. 22042
This report may be downloaded for free at foundation.caionline.org or purchased in multiple quantities from the CAI Press Bookstore. The report may be reproduced for use by community association managers, association board members, industry professionals, and community residents without permission, under the following conditions: the document must be reproduced in its entirety, including identifying the publisher and including the use permission statement; the document may not be amended, altered, modified or revised from the original text presented here; the document may not be sold or used for any for-profit purpose.
2
FOUNDATION.CAIONLINE.ORG
RESERVE FUNDING
CONTENTS
Best Practices Definition.......................................................................................................Page 4 Overview...............................................................................................................................Page 5 Adherence to Federal and State Regulations.......................................................................Page 8 Reserve Study Preparation & Review..................................................................................Page 13 Communicating the Reserve Study.....................................................................................Page 20 Trends in Reserves and Reserves Management..................................................................Page 22 Conclusion...........................................................................................................................Page 29 Case Studies........................................................................................................................Page 30 Additional Resources..........................................................................................................Page 38
3
FOUNDATION.CAIONLINE.ORG
RESERVE FUNDING
WHAT ARE BEST PRACTICES?
The Foundation for Community Association Research is proud to offer function-specific Best Practices Reports for the community association industry. The Foundation has developed best practices in select topic areas using a variety of sources including recommendations from industry experts and various industry- related publications.
The outcomes of the best practices project include:
• Documented criteria for function-specific best practices. • Case studies of community associations that have demonstrated success. • The development of a showcase on community excellence.
The benefits of benchmarking and best practices include: improving quality; setting high perfor- mance targets; helping to build confidence that stretched goals are possible; strengthening cost posi- tions; developing innovative approaches to operating and managing practices; accelerating culture change by looking outward; and bringing accountability to the organization. The Foundation’s entire catalog of Best Practices Reports is available at foundation.caionline.org as free downloads. Printed versions are for sale at www.caionline.org/shop. For additional guidance on analyzing, managing, funding, and forecasting association reserves, consult Reserve Studies and Funds GAP , Reserve Study Standards, Explanation of Reserve Study Standards, and CAI courses M-206: Financial Management and M-201: Facilities Management .
4
FOUNDATION.CAIONLINE.ORG
RESERVE FUNDING
OVERVIEW
Since the early 1970s, community associations such as condominium associations, cooperatives, and planned communities have experienced exponential growth. This growth is expected to continue for the foreseeable future in the United States and globally. Approximately 35 percent of U.S. housing inventory exists in planned or managed residential communities, generally referred to as common interest communities or community associations. The Foundation for Community Association Research estimates that in 2026, there are nearly 375,000 established community associations in the U.S. representing 30 million housing units and 80 million residents. Community associations also are a growing trend in Europe, Australia, South Africa, and the Middle East. WHAT ARE RESERVE FUNDS AND WHY DO THEY EXIST?
RESERVE BALANCE: Actual or projected funds clearly identified either at the begin- ning or end of the associa- tion’s fiscal year that will be used to fund reserve com- ponent expenditures. The source of this information should be disclosed within the reserve study. Also known as beginning balance, reserves, reserve accounts, or cash reserves. This balance is based on provided informa- tion and not audited.
Community associations come in all sizes. They vary by age, type, amenities provided, and maintenance obligations. Careful planning for future repairs and replacement is in the best interests of the community association, and also required by law in many states. Maintaining an adequate reserve fund helps associations satisfy legal, fiduciary, and professional responsibilities. It also minimizes the need for special assess- ments or borrowing and enhances property values in the community. The concept of reserves—community-wide assessments to fund the replacement of common elements—dates back to 1947 before the first condominium was created in the United States. Every association should have a specific amount of cash in a separate account to fund necessary repairs or replacement projects. These funds are normally known as the reserve account.
There are several reasons why associations need reserves:
• Protect and enhance assets. Funding of reserves protects the physical assets in the communi- ty and the investment each owner made by purchasing a home in the community. By making sure that worn components can be replaced when needed, associations carry out a primary function of good fiscal planning. • Fairness. The most equitable means to fund reserves is a process where every homeowner contributes their fair share over the period where they benefit from the common assets. A
5
FOUNDATION.CAIONLINE.ORG
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.
6
FOUNDATION.CAIONLINE.ORG
RESERVE FUNDING
Table 1 provides a sample reserve study component inventory to illustrate how these elements are typically identified and organized.
Table 1. Example of Reserve Study Component Inventory
Current Replacement Cost
Estimated Useful Life
Estimated Remaining Useful Life
Component Pavement Overlay Pavement Seal Coat Concrete Walkways
Quantity Unit
Unit Cost
28,000
SY
$22.00
$616,000
20
12
28,000
SY
$2.00
$56,000
5
2
34,000
SF
$12.00
$408,000
30
22
Brick Pavers
4,000
SF
$19.00
$76,000
25
17
6’ Wood Fence
900
LF
$48.00
$43,200
20
12
TOTAL
$1,199,200
7
FOUNDATION.CAIONLINE.ORG
RESERVE FUNDING
ADHERENCE TO FEDERAL AND STATE REGULATIONS
One of the most significant forces reshaping reserve study practices and strategies is the rapidly evolving regulatory, lending, and insurance landscape. In recent years, heightened attention to building safety, aging infrastructure, and deferred maintenance has resulted in new statutory requirements at the state level and more stringent underwriting standards at the federal level—particularly for condominium associations. Today, these requirements do more than establish compliance obligations; they directly influence a community’s ability to access mortgage financing, maintain property values, and demonstrate long- term financial sustainability. STATE STATUTORY REQUIREMENTS In response to building failures and growing concern over aging building stock, many states have enact- ed or are considering legislation affecting reserve studies and reserve funding. These laws may require community associations to: • Conduct periodic reserve studies. • Prohibit or restrict the waiver of reserves. • Maintain minimum reserve funding levels. • Perform and fund for preventive maintenance. • Complete structural, facade, or milestone inspections tied to long-term funding plans. States that currently require community associations to conduct reserve studies and/or fund reserves include California, Colorado, Florida, Hawaii, Maryland, Nevada, New Jersey, Ohio, Tennessee, Virginia, and Washington. Similar legislation is pending in additional states. Because statutory requirements continue to evolve, associations and reserve professionals should regularly consult current guidance. The most up-to-date information on state reserve requirements can be found on CAI’s website. FEDERAL LENDING AND REGULATORY REQUIREMENTS FOR CONDOMINIUMS In addition to state law and Reserve Study Standards , federal lending policies play a critical role in shap- ing reserve funding practices for condominium associations. Federal agencies including the Federal Housing Administration , Fannie Mae , and Freddie Mac establish reserve, maintenance, and insurance expectations that directly affect project eligibility.
8
FOUNDATION.CAIONLINE.ORG
RESERVE FUNDING
Over time, these requirements have expanded significantly. Today, most condominium associ- ations seeking conventional or government-backed mortgage financing must comply with detailed financial, physical condition, and insurance standards.
Recent updates to Fannie Mae and Freddie Mac guidance further reinforce a shift toward stronger financial discipline, enhanced documentation, and ongoing monitoring of condominium projects.
Current and emerging federal expectations generally require condominium associations to:
• Provide for adequate funding of replacement reserves and preventive maintenance. • Maintain reserve funding levels of at least 10% of annual assessment income , increasing to 15% for applicable loans beginning in 2027 . • Follow the highest funding level identified in reserve studies , rather than a lower funding approach which provides for adequate funding. The baseline funding methodology is not accepted. • Maintain sufficient documentation demonstrating financial stability, building condition, and absence of critical repairs.
Failure to meet these requirements can render an association ineligible for mortgage financing, directly affecting unit marketability, access to homeownership, and property values.
EXAMPLE: Understanding the 15% Reserve Funding Requirement Fannie Mae and Freddie Mac generally require condominium associations to allocate at least 15% of annual budgeted assessment income to reserves. Certain income sources may be excluded from the calculation, including special assessment income, utility pass-through income, and cer- tain incidental income, as permitted by agency guidelines. EXAMPLE: An association has $900,000 in annual assessment income, plus $100,000 in special assessment income, $50,000 in utility pass-through income, and $25,000 in incidental income. Although total revenue is $1,075,000, the reserve funding calculation would generally be based on the $900,000 in regular assessment income. Under a 15% requirement, the minimum reserve contribution would be $135,000 (15% of $900,000).
Associations should consult current Fannie Mae and Freddie Mac guidance and qualified profes- sionals when evaluating financing eligibility.
9
FOUNDATION.CAIONLINE.ORG
RESERVE FUNDING
FANNIE MAE AND FREDDIE MAC CONDOMINIUM LENDING POLICIES Fannie Mae and Freddie Mac are government-sponsored enterprises that purchase and guarantee mortgages in the secondary market. Their condominium project eligibility standards are closely aligned and increasingly emphasize long-term financial sustainability, building safety, and insurance adequacy.
Recent policy changes introduce several important shifts:
• Elimination of the limited review process , resulting in more projects undergoing full review and increased documentation requirements. • Expanded use of full project reviews and lender questionnaires , increasing administrative responsibilities for associations and managers. • Removal of investor concentration limits , while placing greater emphasis on overall financial health and project stability. • Expanded eligibility for waiver of project review for smaller communities (up to 10 units), offering limited flexibility for certain projects.
In addition, long-standing requirements remain in effect:
• Projects with critical repairs or unsafe conditions are not eligible for lending until repairs are completed. • Critical repairs may include conditions affecting safety, structural integrity, or habitability, including those requiring partial or full evacuation. • Lenders must obtain documentation such as reserve studies, engineering reports, and inspec- tion findings to confirm project condition. • Special assessments are evaluated for purpose, amount, and repayment status, and may impact borrower eligibility. • Associations deemed noncompliant are classified as ineligible for mortgage financing until deficiencies are resolved. Both Fannie Mae and Freddie Mac require lenders to collect and review condominium question- naires (including Forms 1076 and/or 476) along with supporting documentation. FHA CONDOMINIUM LENDING POLICY The FHA insures mortgage loans for individual condominium units under Section 203(b) of the National Housing Act. To be eligible, a condominium project must:
• Be in full compliance with applicable state and local laws. • Be in good standing with relevant regulatory authorities. • Serve as primary residential use and contain at least two dwelling units.
FHA-insured condominium loans may be used to purchase or refinance units in approved projects such as low-rise, mid-rise, high-rise, and certain manufactured housing developments.
FHA condominium lending requirements are periodically reviewed and updated. Associations, managers, and reserve professionals should consult the FHA website for the most current guidance.
10
FOUNDATION.CAIONLINE.ORG
RESERVE FUNDING
INSURANCE REQUIREMENTS AND MARKET REALITIES Updated federal guidance also reflects significant changes in the property insurance landscape. While certain requirements have been relaxed to address market constraints, overall expectations for cover- age and risk management remain high.
Key updates include:
• Greater flexibility in demonstrating coverage sufficiency, including removal of strict replace- ment cost documentation requirements. • Elimination of requirements to insure roofs at full replacement cost and removal of inflation guard requirements. • Establishment of a maximum per-unit deductible of $50,000 for master policies. • Increased reliance on unit owner (H06) policies where gaps exist in master coverage or where deductibles apply. These changes acknowledge current insurance market challenges while maintaining a baseline level of protection and shifting more responsibility to associations and unit owners to coordinate cov- erage effectively.
Federal guidance now emphasizes that compliance is not a one-time event but an ongoing respon- sibility. New expectations include:
• Annual verification of insurance coverage by servicers. • Monitoring for reductions in coverage over time. • Annual communication reminding borrowers of their obligation to maintain insurance. These requirements increase transparency and oversight throughout the life of the loan and rein- force the importance of maintaining current, accurate documentation. PRACTICAL IMPLICATIONS FOR BOARDS AND MANAGEMENT Given the growing complexity of regulatory, lending, and insurance requirements, boards and com- munity association managers play a critical role in maintaining eligibility and responding to lender inquiries. Best practices include: • Maintaining current reserve studies, completed within the last three years, that reflect ade- quate funding levels. • Formally adopting and documenting a reserve funding plan. While reserve studies may pres- ent multiple funding scenarios, boards should select a defined strategy and align budgets accordingly. With evolving federal requirements, a clearly adopted plan supports compliance, financial stability, and lender confidence. • Reviewing insurance coverage, deductibles, and alignment between master and unit owner policies. • Retaining recent engineering reports, inspection records, and building condition assessments. • Responding promptly and accurately to lender questionnaires and documentation requests. • Directing technical or engineering questions to qualified professionals such as engineers, architects, or reserve providers. • Establishing procedures for releasing information, including indemnification protocols when appropriate.
11
FOUNDATION.CAIONLINE.ORG
RESERVE FUNDING
SUMMARY Regulatory requirements, lending standards, and insurance expectations increasingly influence how associations establish their reserve funding plans. Reserve studies must now do more than project capital needs—they must support financial trans- parency, demonstrate compliance with evolving lending standards, and position the community to maintain access to mortgage financing. These external factors should be considered during reserve study preparation and updates to ensure funding strategies support long-term asset sustainability, regulatory compliance, and contin- ued marketability.
12
FOUNDATION.CAIONLINE.ORG
RESERVE FUNDING
RESERVE STUDY PREPARATION & REVIEW
WHO PREPARES THE STUDY & THEIR RESPONSIBILITIES While boards of directors retain ultimate fiduciary responsibility for the association’s financial health, they are generally not well served by preparing their own reserve studies. Although some of the math- ematical and accounting elements of a reserve study may appear straightforward, the process requires specialized professional judgment. Accurately identifying reserve components, establishing realistic replacement costs, evaluating existing conditions, and estimating remaining useful life all demand technical expertise that extends well beyond basic budgeting skills. A professionally prepared reserve study brings together construction knowledge, cost estimating, condition assessment, and long-term financial modeling. Attempting to perform this work without appropriate training and experience increases the risk of underfunding, overfunding, or overlooking critical components that can expose the association to financial strain and operational disruption.
Reserve Specialist One of the most important responsibilities of any board and its management team is the thoughtful selection of qualified professional partners including the reserve pro- fessional. Because this relationship often spans multiple years and directly informs major financial decisions, the hiring of a competent, well-seasoned reserve profession- al should be a deliberate and methodical process.
PROFESSIONAL INSIGHT: Given the need to affirm board and management fiduciary responsibil- ities, CAI recommends the use of a professional holding the Reserve Specialist (RS TM ) designation.
A qualified reserve professional provides indepen- dent analysis, informed judgment, and recommendations
grounded in industry standards and real-world experience. Shortcomings in the selection or perfor- mance of a reserve professional can have serious consequences including inadequate reserve balances, unexpected special assessments, reliance on costly loans, and potential erosion of property values. To properly execute a reserve study and develop a defensible long-term funding strategy for the community, the reserve professional must possess a broad range of technical skills including compo- nent evaluation, unit pricing, condition assessment, and sophisticated financial modeling. While pro- fessional managers and volunteer board members bring valuable operational insight and institutional knowledge, they do not typically have the specialized expertise required to prepare a reserve study. For this reason, best practice encourages every association to engage a reserve professional who holds the RS designation as a minimum qualification. Doing so helps ensure that reserve recommen- dations are credible, consistent with established standards, and capable of withstanding scrutiny from lenders, regulators, insurers, and homeowners.
13
FOUNDATION.CAIONLINE.ORG
RESERVE FUNDING
Issues to consider when narrowing your choice of a reserve professional:
1. Have they earned the RS designation with CAI? What other designations and credentials do they hold? 2. Does the firm have other professional licenses or credentials, such as professional engineer, general contractor, architect, or other qualifications demonstrating competency? 3. Will all work in the study be completed by employees of the firm? 4. In what other professional organizations is the reserve company involved? 5. What type of insurance does the reserve study specialist carry? Do they have errors and omissions insurance? 6. Can you view a sample study from the firm? 7. What level of study is offered? 8. Does the study conform with CAI’s Reserve Study Standards as well as any statutory requirements? 9. What deliverables will be received? 10. Will the provider allow the manager and board to participate in the development of the study? To what extent? 11. Are you able to revise the report? 12. What support/services will you receive beyond the report? To find individuals with the RS designation, visit CAI’s Directory of Credentialed Professionals at https://www.caionline.org/directory-of-credentialed-professionals and search for RS. HOW TO PREPARE THE STUDY Accurate reserve funding projections depend on the reliability of the data supplied to the reserve pro- fessional. Community associations and their managers play a critical role in providing clear, complete, and timely information. The reserve specialist also carries an essential responsibility to evaluate that information, verify it where appropriate, and alert the client to inconsistencies or gaps.
Homeowner Leaders
Management
Best Outcome
Reserve Specialists
This Venn diagram highlights the best outcome achieved when the board sets clear priorities, management provides essential operational insight, and reserve specialists translate both into a sound, long-term funding plan that aligns vision, day-to-day realities, and financial strategy for the community’s success.
14
FOUNDATION.CAIONLINE.ORG
RESERVE FUNDING
Reserve Study Components A reserve study is built on two interrelated components: a physical evaluation and a financial analysis. Together, these elements translate the condition of the association’s assets into a long-term funding plan that supports informed decision-making and fiscal sustainability.
Physical Evaluation The most critical decision in conducting a reserve study is selecting which components to include. This requires analysis of the association's governing documents, application of CAI’s Reserve Study Standards’ three-part test, and applicable state statutes and civil codes in addition to the physical inspection of each component. Preparation of the Physical Evaluation As part of the preparation of the reserve study, the association should provide the reserve specialist with:
PHYSICAL EVALUATION: The portion of the reserve study where the compo- nent inventory, condition assessment, and life and valuation estimate tasks are performed. This represents one of the two parts of the reserve study.
1. Date-in-service information for the components when available. 2. Contracts for recent capital projects, quotes for future work, and inspection reports such as engineering and turnover reports when available. 3. Any available engineering reports, specialty studies, or invasive inspection results for compo- nents that are not readily visible during a reserve study inspection such as piping, electrical wiring, and stormwater pond bathymetric surveys. Since reserve studies are based primarily on visual observations, these supplemental evaluations can help improve the accuracy of com- ponent condition assessments, remaining useful life estimates, and funding recommendations. THREE-PART TEST: 1. The association has the obligation to maintain or replace the existing element. 2. The need and schedule for this project can be reasonably anticipated. 3. The total cost for the project is relevant to the association, can be reasonably estimated, and includes all direct and related costs.
As part of the preparation of the reserve study, the reserve specialist should:
1. Work with the association to agree on reserve study components utilizing the three-part test. • If the study is an update to an existing study, the previous inventory should be reviewed and discussed. 2. Review all supplied information to uncover any potential inconsistencies, omissions, or values that appear outside industry norms. • If the study is an update, review all assumptions from the previous study as part of the update. 3. Apply professional judgment when discrepancies arise, including comparing information to prior studies, known construction standards, or reasonable expectations for similar communities.
15
FOUNDATION.CAIONLINE.ORG
RESERVE FUNDING
4. Request clarification or additional documentation whenever the data appears incomplete, inaccurate, or contradictory. 5. Encourage association participation during the site inspection to answer questions in real time. REVIEW AND FINALIZATION OF THE PHYSICAL EVALUATION Associations should review the reserve study to evaluate the accuracy of the information presented. Associations should periodically review the reserve study and update as needed to ensure it remains accurate.
During this process, it’s important to consider:
1. Does the component inventory accurately reflect ownership/maintenance responsibilities? 2. Does the reserve component inventory align with the association’s operations? • If an association funds sidewalk repairs from the reserve account, ensure that sidewalks are included as a reserve expense. If an association funds sidewalk repairs from the operating budget annually, ensure that sidewalks are not included as a reserve expense. 3. Does the reserve study consider the association’s preventative maintenance practices? • If an association is performing preventative maintenance on its clubhouse HVAC unit, you can anticipate a longer useful life than an association that isn’t performing preventative mainte- nance. 4. If you perform periodic inspections or repair projects that satisfy the three-part test, does the reserve study include these projects as a reserve expenditure? • Examples include structural inspections, pond surveys, tree surveys, electrical thermoscans, and pipe studies. 5. Does the reserve study disclose all reserve components regardless of age? • If a condominium was built five years ago, you likely don’t need to begin funding for pipe replacements. However, the useful life and cost should be listed for awareness as a long-life component. 6. Is the starting reserve balance accurate? 7. Are current year reserve contributions accurate? 8. Is the history of the components accurate? • If the pipes were replaced 10 years ago, ensure it is reflected in the study. KEY CONSIDERATIONS: 1. The inspection is limited to a visual, noninvasive inspection. Preventive maintenance evalu- ations, periodic structural inspections and more invasive inspections and testing should be updated prior to the reserve study so they may be incorporated into the reserve study update. 2. The replacement costs are estimates that incorporate inflation projections. If you are aware of unique pricing circumstances such as rare equipment, difficult access, utilization of interi- or designers, or construction observation for your projects, make sure to inform the reserve specialist. 3. Freeze–thaw cycles, coastal conditions, high UV exposure, and humidity all influence deterio- ration and will affect the components’ useful lives. 4. Capital improvement vs. reserve expense. • The initial construction cost of a new capital addition that did not previously exist should not be
16
FOUNDATION.CAIONLINE.ORG
RESERVE FUNDING
a reserve expenditure. Once a first-time capital addition has progressed beyond concept and the association has established a clear obligation for its future maintenance or replacement, reserve funding can be incorporated for future projects. Each project should have a defined scope, a planned timeframe, and a cost that can be reasonably estimated. • For example, if an association has formally approved construction of a new clubhouse, funding should be obtained outside of reserves for the initial construction of that clubhouse. However, once the project specifications, including details and design, are finalized and a target con- struction year has been confirmed, reserve funding for future projects such as painting, roof replacement, HVAC, interior remodeling, etc., can be incorporated accordingly. • If the community is updating a component to a different material or equipment type without changing its usage, this is not considered a capital improvement and can be a reserve expense. PREPARATION OF THE FINANCIAL ANALYSIS
FINANCIAL ANALYSIS: The portion of a reserve study where current status of reserves (measured as cash or percent funded) and a recommended reserve funding plan are document- ed and projected reserve income and expenses are presented. The financial analysis is one of the two parts of a reserve study. Funding plans should extend a minimum of 30 years into the future.
Reserve Study Standards define adequate reserves as a replace- ment fund. It’s a stable and equitable multiyear funding plan that provides for the reliable and timely execution of the asso- ciation’s major repair and replacement projects without reliance on supplemental funding. While Reserve Study Standards recognize multiple funding methodologies and funding goals as capable of producing adequate reserves, evolving lender requirements, insurance considerations, and regulatory expectations may limit the prac- tical applicability of certain approaches and increasingly favor higher levels of reserve funding. Associations should evaluate reserve funding methodolo- gies in light of their governing documents, risk profile, lending considerations, insurance requirements, and long-term finan- cial objectives when selecting a funding plan.
KEY FUNDING METHODOLOGY TERMS • Cash flow method (also known as pooling). A method where funding of reserves is designed to offset future expenditures from the reserve fund. This can be prepared to accomplish any of the three funding goals. • Component method (also known as straight line). A method where total funding is based on the sum of funding for individual components.
17
FOUNDATION.CAIONLINE.ORG
RESERVE FUNDING
FUNDING GOALS • Full funding. Setting a reserve funding goal to attain and maintain reserves at or near 100 per- cent funded. Risk assessment: Generally, this is the most conservative. • Threshold funding. Establishing a goal of keeping the reserve balance above a specified dollar or percent funded amount. Risk assessment: Risk varies. • Baseline Funding. Establishing a goal allowing the reserve cash balance to be at or near zero during the cash-flow projection. Risk assessment: Greatest risk.
FUNDING PLAN EXAMPLES While percent funded is an indicator of an association’s reserve fund size, it should be viewed in the context of how it changes due to the association’s reserve funding plan and risk tolerance. It is not itself a measure of adequacy. This graph highlights how account balances vary across different funding methodologies.
18
FOUNDATION.CAIONLINE.ORG
RESERVE FUNDING
REVIEW AND FINALIZATION OF THE FINANCIAL ANALYSIS Associations should review the reserve study before acceptance to evaluate the accuracy of the infor- mation presented. Associations should periodically review the reserve study and update as needed to ensure the reserve study remains accurate.
During this process, it’s important to consider:
1. Is the starting reserve balance accurate? 2. Are current-year reserve contributions accurate? 3. Do you understand the funding methodology? 4. Do you agree with the funding strategy, or does the community prefer to be more or less risk-averse? KEY CONSIDERATIONS: 1. The association needs to provide accurate financials so the reserve specialist has a clear understanding of the starting reserve balance, current operating budget, and current reserve contributions. 2. The cash flow method is typically preferred. With large variances in component costs and differences in useful and remaining lives, it is not necessary to fully fund each component as long as an adequate threshold is maintained. The fund balance is often compared to the total replacement cost of all reserve components. Some reserve professionals use 5%–10% of total replacement costs as the cash balance threshold. This provides a simple measure of financial exposure that boards can easily understand. 3. Adequacy can be addressed by using available funding goals. For example, a funding goal could be a fixed number developed by the board and analyst, threshold dollar amount relative to the expenses, or a minimum percent funded number. 4. Percent funded is a helpful indicator of reserve fund status, but it is not a stand-alone measure of adequacy. While percent funded measures the ratio of current reserves to the fully funded balance, it should be considered in the context of the association’s reserve funding plan, risk tolerance, and agreed-upon minimum reserve threshold. The association and reserve special- ist should establish this minimum threshold based on factors such as building characteristics, long-life components, environmental exposure, concealed-system uncertainty, contingency needs, and the board’s overall tolerance for financial risk. 5. If the association has an unexpected event such as major repairs, insurance losses, or con- struction defects and receives or spends funds outside the study recommendations, the study should be updated to incorporate the unexpected event. This can be an unanticipated expen- diture such as hail damage to roofs or financial change such as receiving a construction defect lawsuit payment. 6. If your reserve study provides multiple funding option recommendations, the association should select one funding plan to ensure clarity and consistency.
19
FOUNDATION.CAIONLINE.ORG
RESERVE FUNDING
COMMUNICATING THE RESERVE STUDY
MAKING RESERVE STUDY FINDINGS CLEAR AND ACCESSIBLE FOR RESIDENTS A reserve study is a vital roadmap for maintaining community assets and financial health. It outlines a plan for major repairs and replacements that ensures fairness, stability, and property value protection. A study is only effective if homeowners understand its purpose and findings. The association should collaborate with the reserve specialist to develop a communication strategy to:
1. Explain the reserve study’s purpose. 2. Address common questions about funding and assessments. 3. Emphasize long-term benefits for all residents.
Here are suggestions to consider for a communication strategy:
1. Provide a Clear Executive Summary Instead of sharing a lengthy technical report, create a one-page overview highlighting: 1. Total reserve balance. 2. Key projects and timelines. 3. Reserve study funding recommendations and the board’s funding recommendation. 2. Use Visual Aids Graphs, charts, and infographics make complex data easier to digest. Examples include: 1. A timeline of upcoming projects. 2. Pie charts showing how funds are allocated. 3. Visuals of reserve funding levels. 3. Explain Expenditures in Everyday Terms Homeowners want to know what the money is for and why it matters. Provide short descriptions like: 1. Roof replacement ensures structural integrity and prevents costly water damage. 2. Pool resurfacing maintains safety and aesthetics.
4. Address Concerns with Transparency Prepare guidance for handling questions or resistance:
1. Explain that the purpose of establishing and maintaining adequate reserve funds is to ensure an association can afford capital projects when needed and minimize the risk of additional financial assessments as the community ages. - Emphasize fairness and predictability. - Show how reserves prevent large special assessments. - Share case studies from other communities. Ask your reserve specialist or management professional for examples.
20
FOUNDATION.CAIONLINE.ORG
RESERVE FUNDING
KEY CONSIDERATIONS:
1. By improving communication, every homeowner understands how the reserve study benefits their community today and in the future. 2. Consider having the reserve specialist attend a board meeting to explain the findings. 3. Reserve specialists can potentially offer communication strategy templates and scripts. 4. Ensure homeowners have access to the reserve study findings through the association website or other portals. Utilizing Your Reserve Study The most successful associations utilize reserve studies as a starting point and continually assess chang- ing needs to attain long-term success by: 1. Reviewing it annually to determine if scheduled projects need to be completed. • If the project is structural in nature, seek a professional opinion before deferring. 2. Reach out for clarification as you embark on a reserve project. 3. Minor adjustments to the plan can be handled internally via the workable file provided by the reserve specialist. Complex changes might indicate the need for an updated reserve study. • Begin by updating the current year’s expenditures and reserve contributions. Next, review each deferred project and determine whether it needs to be completed in the upcom- ing year. Update the timing of any deferred expenditures. Once complete, the updated expenditure tables and funding plan can guide next year’s budget process. • Updated numbers enable associations to evaluate changing needs and address potential shortages in advance.
21
FOUNDATION.CAIONLINE.ORG
RESERVE FUNDING
TRENDS IN RESERVES AND RESERVES MANAGEMENT
Reserve studies and reserve funding practices have evolved significantly over the past decade as community associations confront aging infrastructure, rising replacement costs, and increasing expectations from owners, lenders, insurers, and regulators. Reserve planning is now widely recognized as a strategic financial tool that supports risk management, asset preservation, and long-term community sustainability. This section examines the key trends shaping reserve management today. They include aging infrastructure challenges; sustainability and energy efficiency investments; curb appeal and project staging considerations; emerging technologies and analytical tools; expanding statutory, lending, and insurance requirements; and the integration of fire hardening, wildfire mitigation, and flood-proofing into planning decisions. TRENDS: AGING FACILITIES AND INFRASTRUCTURE Much has been written about the impact of aging residents and how their communities are adapting to meet a graying demographic. The same type of evolution also is underway with the association’s phys- ical components. In Breaking Point , a report prepared by the Foundation for Community Association Research, nearly half (40%) of those surveyed considered deteriorating infrastructure a top-ranked concern. For example, an association built in the late 1970s is approximately 50 years old as of 2026. With reserve studies having a prospective term of 30 years, this 1970s-era community now has component maintenance obligations for items projected to be between 40–70+ years old. A 1970s-era communi- ty’s funding obligations may look entirely different from a component inventory of a community asso- ciation built in 2020. This expanded component list might contain infrastructure items that are starting to show signs of failure such as storm drain systems, domestic water systems, irrigation piping, and electrical systems. There may be safety issues with retaining walls or balconies and cantilevered deck- ing areas requiring further inspection by engineers or other specialists to augment the reserve study. Research shows homeowners and residents are more receptive and supportive of major infrastruc- ture repairs when they can learn in advance about the scope and costs of the project from experts like the engineers and contractors with specific knowledge of the damage and how to fix it. They are more willing to authorize assessment increases and agree to allocating a larger portion of the association’s budget to reserves.
22
FOUNDATION.CAIONLINE.ORG
RESERVE FUNDING
A clear example of this dynamic occurred at University Towers Condominiums in New Haven, Conn., where a 238- unit building faced widespread resident complaints about noise and energy inefficiency from its original 1958 windows. What began as a feasibility review evolved into a $10 mil- lion, multi-phased replace- ment project after asbestos and structural complications were discovered. With 80%
PROFESSIONAL INSIGHT: The association should work with its reserve specialist to confirm the component inventory reflects the aging of com- ponents over 30 years. For communities more than 30 years old, the board should consider investigating the possibili- ty that other experts such as a structural engineer may be needed for the long-term viability of the reserve compo- nents. As communities age, this review should be performed during reserve updates to confirm any previously long-life components are included in the funding plan.
homeowner approval, the board secured financing for two phases, ultimately completing the project under budget. Management credited consistent communication and education that explained the scope, costs, and long-term implications as critical to gaining owner support for loans, assessment increases, and significantly higher reserve funding levels moving forward. TRENDS: RESERVE STUDY UTILIZATION Banking and Lending Requirements Associations that lack current reserve studies, have inadequate reserve funding, or demonstrate signif- icant deferred maintenance risk being deemed ineligible for many types of loans or mortgages. This has placed new pressure on boards to maintain adequate reserves to preserve mortgage eligibility and protect home values. Insurance Market Pressures Insurance carriers also have become more demanding. In many regions, insurers now require docu- mentation of structural integrity, waterproofing conditions, or major system maintenance before under- writing or renewing policies. Some carriers ask directly whether the association follows reserve study recommendations or whether adequate funding is in place to address foreseeable repairs. Associations with outdated reserve studies or inconsistent funding patterns may face significantly higher premiums, exclusions, or nonrenewal. Reserve studies and reserve funding are increasingly becoming essential indicators of the associ- ation’s financial and physical stability. The external pressures are accelerating the adoption of more rigorous, frequent, and realistically funded reserve study programs. TRENDS: INNOVATION AND ENERGY Reserve studies are an excellent tool for bringing innovation, energy savings, technological advances, cost savings, and environmental benefits to community associations. Drought conditions in many areas of the country have led to increased government regulation of watering and turf reduction. Using inno- vative techniques when replacing reserve components can help associations comply with regulations while generating a return on investment for their operating and reserve budgets.
23
FOUNDATION.CAIONLINE.ORG
Page i Page ii Page 1 Page 2 Page 3 Page 4 Page 5 Page 6 Page 7 Page 8 Page 9 Page 10 Page 11 Page 12 Page 13 Page 14 Page 15 Page 16 Page 17 Page 18 Page 19 Page 20 Page 21 Page 22 Page 23 Page 24 Page 25 Page 26 Page 27 Page 28 Page 29 Page 30 Page 31 Page 32 Page 33 Page 34 Page 35 Page 36 Page 37 Page 38 Page 39 Page 40 Page 41 Page 42Made with FlippingBook - PDF hosting