What Is a Reserve Study, and What Should Your Board Do With It?

A reserve study is a long-term savings plan for the things your community association will have to replace: roofs, paving, painting, pools, elevators, mechanical systems and the rest. It tells the board what the association owns, when each item will wear out, what it will cost, and how much to put aside every year so the money is there when it is needed.

That is the textbook answer. The practical answer is that a reserve study is the document that decides whether your owners face a gradual increase in dues or a large special assessment. Most boards receive a 60-page report, read the summary and file it. I build the software that produces these reports, and this guide is about reading one the way it is meant to be read.

Here is what matters most:

• Every reserve study has two parts: a physical analysis (what you own and what condition it is in) and a financial analysis (how much you have, how much you need, and the funding plan).
• There are three levels: a full study with a site visit and new inventory, an update with a site visit, and an update without one.
• The key outputs are percent funded, the recommended yearly contribution, and a 30-year cash flow.
• A study is usually presented with more than one funding plan: baseline, threshold and full funding.
• The most useful page is the 30-year cash flow, because it shows the year your money would run out at your current contribution.

The two parts of every reserve study

The physical analysis is the inventory. The preparer walks the property, lists every component the association is responsible for that meets a cost threshold, and records quantity, condition, useful life and remaining life. It is usually organised by category: site and grounds, building exteriors, mechanical, electrical and plumbing, interiors, amenities. Each item gets a replacement cost.

The financial analysis turns that inventory into money. It starts with the current reserve balance, works out the fully funded balance (the share of each component that has already worn out, in dollars), and builds a funding plan that inflates every replacement to the year it falls due and shows the balance year by year.

The three levels of study

The National Reserve Study Standards from the Community Associations Institute define three levels:

• Level I, full study. New inventory from a site visit, condition assessment, life and cost estimates and a funding plan. Done the first time and when the old study is badly out of date.
• Level II, update with site visit. Uses the existing inventory, checks condition on site and updates costs, lives and the funding plan.
• Level III, update without site visit. Updates costs, balances and the funding plan from the existing inventory without visiting.

A common cycle is a Level II update with a site visit every three to five years and Level III updates in between. Some states set the schedule: California requires a site inspection at least every three years and a review every year.

The three numbers that matter

Percent funded. Your reserve balance divided by the fully funded balance. Under about 30% is generally considered weak, 30% to 70% fair, and 70% and above strong. It is the best single measure of reserve health, and it is the number to compare year over year.

Recommended contribution. What the study suggests the association put into reserves each year under the chosen funding plan. If the budget contributes less than this, the board is choosing to fall behind.

The 30-year cash flow. A table of beginning balance, contributions, interest, planned replacements and ending balance for each of the next 30 years. Any year where the ending balance goes negative is a year when a special assessment or loan becomes likely.

The funding plans in a reserve study

Most studies present more than one plan.

• Baseline funding keeps the reserve balance above zero in every year. It is the cheapest plan that technically works, with no cushion for surprises.
• Threshold funding keeps the balance above a level the board chooses, such as a minimum percent funded or a dollar floor.
• Full funding aims to reach and stay near 100% funded. It costs the most today and spreads the cost of wear fairly across owners over time.

Choosing between them is a board decision, but it is also constrained by law and lending rules. Florida, for example, no longer lets condo associations waive reserves for structural items in buildings three or more stories tall, and Fannie Mae's condo rules are tightening how reserve studies can be used to justify lower funding.

Who prepares a reserve study

Reserve studies are prepared by reserve professionals, commonly holders of the Reserve Specialist designation from the Community Associations Institute or the Professional Reserve Analyst designation from the Association of Professional Reserve Analysts, and by engineering firms. Some work, such as Florida's structural integrity reserve study, must be performed or verified by a licensed engineer or architect or a certified reserve professional.

The inspection is only part of the job. After the site visit, the preparer sorts photos, types up field notes, prices components, builds the funding plans and writes the report. In many firms that reporting work takes as long as the inspection.

How to read your study in fifteen minutes

1. Check the date and level. A full study from six years ago with no updates is out of date.
2. Read the percent funded on the summary page, then work out today's figure using your current balance.
3. Skim the component list for anything missing or anything that has already been replaced.
4. Find the inflation rate the study assumed and ask whether it reflects current construction costs.
5. Go to the 30-year cash flow and find the lowest ending balance at the contribution you are actually making.

You can do step 5 interactively with our free HOA reserve fund calculator. Enter your study's components, balance and contribution, and it shows percent funded, the year the fund runs short and the contribution that fixes it.

Frequently asked questions

What is a reserve study for an HOA?

It is a long-term plan for repairing and replacing the major components an HOA is responsible for. It lists what the association owns, estimates when each item will need replacing and what it will cost, and recommends how much to put into reserves each year.

Is a reserve study required?

It depends on your state and governing documents. Several states require reserve studies for some or all associations, including California, Florida for condo buildings three or more stories, and New Jersey for condominiums. Lenders also look at reserves when financing condo units.

How long does a reserve study take?

The site visit can take from a few hours to a few days depending on the property. The report usually follows weeks later, because most of the time goes into sorting photos, entering data, pricing components and writing the report.

What is the difference between a reserve study and a SIRS?

A reserve study covers every component the association must replace. A Florida structural integrity reserve study, or SIRS, focuses on structural and life-safety items in condo buildings three or more stories tall, and its reserves cannot be waived. See our guide to the Florida SIRS report.

For reserve professionals

If you prepare studies and reporting time limits how many you can take on, our engine drafts the full study, inventory, funding plans and narrative, from your inspector's notes and photos, in your template. See AI reserve study software.