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How to Read your Reserve Study

By Mike Price CMCA, AMS, RS

Not all Reserve Studies are the same. Most professionally prepared Reserve Study Report state the following key pieces of information in the first few pages of the Report:

  1. Name and location of the association.
  2. Who prepared the study or supervised its production.
  3. What credentials and experience the preparer holds.
  4. Current Reserve Fund status.
  5. Methods and objectives utilized in computing or evaluating the association's Reserve Fund status.
  6. Type of report: Full study with site inspection (Level I), Update with site inspection (Level II) or Update without site inspection (Level III).
  7. Starting reserve fund balance for report period.
  8. Report period covered.
  9. List of reserve components requiring funding.
  10. Listing of component quantities or descriptions, and current replacement cost.
  11. Methods and goals of the funding plan using National Standard terminology. Goals can be Full Funding, Threshold Funding (Hawaii 50% Funding), or Baseline Funding (Hawaii Cash Flow Method).

This is a partial list of what is required by National Reserve Study Standards (NRSS). The National Reserve Study Standards provides a check list of items required in the report. Download and use the checklist found at CAI website www.caionline.org .

The Reserve Study is a budgeting tool for properly maintaining the property major assets (components) in the future without cash problems, deferred replacement, or need for loans or special assessments. A Reserve Study should be prepared without bias. This is achieved by selecting an independent preparer or someone with no interest or investment in the property. The current status and strength of the Reserve fund is based on a complete Component list and an accurate evaluation of the state of deterioration of the Components. Fact: all reserve components start deteriorating as soon as they are installed and begin service. Leaving components off the component list, overestimating reasonable and predictable Useful Life (UL) of a component, or underestimating the deterioration and resulting Remaining Useful Life (RUL) left before replacement is necessary, biases the Reserve Fund Current Status. This puts the association at risk of cash problems and deferred maintenance in the future. It's your reserve study and you have a considerable investment in your home and share of the Common Areas of the association. Make sure the Component List is complete, accurate and reflects the true deterioration of the components listed.

Future projections of component cost, Remaining Useful Life (RUL), and scheduled replacement are based on current conditions. The Current Fund Status and Fund Strength mentioned above are considered accurate and reliable calculations. The Report future funding plan and component replacement schedule is much less reliable. Calculations are based on prediction of future events that may or may not occur exactly as predicted. These projections, based on current economic trends, are better than ignoring future funding requirements. Due to unknown future events, accuracy of these projections certainly diminishes with time. The first 5 years of the Reserve Study projected future funding plans have much more reliability than projections from year 6 onward into the distant unpredictable future. Future economic conditions can not be predicted with complete accuracy. For example, did we know how long the current Recession would last in 2008 (5 years ago)?

Hawaii State Law requires the Board of Directors annually review and adjust the association Reserve Funding Plan for current conditions. This rule was put into law to maintain reliability and adequate funding for major component replacement in the future. Due diligence by the Board will verify if the projected costs, deterioration and scheduled replacement of the current fiscal year match the projections provided in the Reserve funding plan being used. If current conditions do not match the Reserve funding plan projections then the plan and resulting reserve contribution rate needs to be adjusted. If component replacement is not performed as scheduled then the deteriorated cost remains and requires adequate funding and replacement rescheduling in the future. Ignoring these changes and not adjusting reserve funding is unacceptable under Hawaii Law.

Now that you have read and evaluated the key parts of your reserve study, do you feel secure and protected from future surprise cash problems, special assessments or need for loans to make up for inadequate funding? If not, it is time to update the reserve study to current conditions of the association.

About the Author: Mike Price - CAI Reserve Specialist #164 and former President of Association Reserves Hawaii LLC, provides independent third party comprehensive reserve studies for all Islands. Mr. Price has a bachelor degree from Eastern Washington University and over 30 years experience in construction and project management. He holds the CMCA and AMS designations as a past condominium Site Manager and General Manager. Mr. Price can be contacted at mprice@akamaireserves.com or (808) 936-4789.