Reserve Studies - The Complete Guide is 436 pages explaining the concepts and process for making a reserve study. For more information and to order, click here.

 

 

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What components should be included in the reserve study?

There is no single answer to the question of what items should be included in a reserve study. National standards established by CAI (community Associations Institute) indicate what common sense also tells us. The four standards established are: (1) the Association has maintenance responsibility, (2) there is a limited useful life, (3) there is a predictable remaining life, (4) there is a determinable major repair or replacement cost that falls above a minimum threshold.

One overriding factor that must be considered is the association’s maintenance plan.  The reserve study should be a reflection of the association’s maintenance plan. For condominium projects, most major components should be included in the reserve study. These components would generally include roofing, painting, paving, and fencing. If, however, as an example, an association was replacing portions of its fencing each year that matches the replacement life cycle, it may be appropriate to pay for this expense from the operating budget rather than the reserve budget. While that would be an extremely rare circumstance, it does demonstrate how an association's maintenance plan and budget and reserve policies can affect the reserve study.

The Association should only include components for which it has maintenance responsibility. An examination of the association’s governing documents will generally provide guidance on this determination.

It is possible to take the position that all components have a limited useful life. However a reasonable interpretation of the standard is that the limited useful life would fall within time periods reasonably related to the financial forecast period.  As an example, a building structure is generally excluded from the reserve study as it is considered to be a lifetime component. That is, it has indeterminate useful life. The plumbing lines contained within the walls of the building structure are also normally considered to be lifetime components. However, if it is discovered that the plumbing lines are failing, and that the Association has a high probability of future expenditures to repair such plumbing, then this component should be included in the reserve study. Another example might be a roof with a remaining life of 40 years. Some people hold that this roof should not be included in the reserve study until it falls within the 30 year financial projection. We disagree. We believe that even though the initial life extends beyond the 30 year forecast period, it is still a limited useful life that is reasonably subject to estimation it should be included in the reserve study. If it has not previously been included in the reserve study but now has a remaining life of less than 30 years it should now be included in the reserve study.

The minimum threshold for inclusion in the reserve analysis will vary from association to association. A small association with a $100,000 annual budget will have a relatively low threshold, perhaps $500. A large association with a $12 million annual budget will likely have a much higher threshold, perhaps $10,000. Items that fall below these thresholds should be included in the association’s annual operating budget.