Reserve Study Information: What is a Reserve Study?

Current Industry Status of the Reserve Study (RS) Process

Many within the industry fail to recognize that the Reserve Study is simply a form of a long-term capital budget. Current industry standards based on a once-every-three-years site visit and a static, paper report will continue to result in failure to meet expectations.  The current process used by the industry contains so many disconnects that it is not surprising that special assessments are somewhat commonplace, even where RS reports have been prepared annually.  Even where associations use Reserve Study software to provide more current information, software limitations prevent the creation of an effective knowledge based system.

There is a basic misunderstanding in people regarding what is a reserve study process.  The HOA industry views the Reserve Study as a stand-alone capital budgeting process, and the RS report as the end product of that process.  In fact, the focus should be on the establishment of RS policies and a long-term facilities maintenance plan that is integrated with operating facilities maintenance activities.

Current industry practice is to have a site visit RS evaluation made every three to five years, resulting in the issuance of a static, paper report.  This is typically done based on a site visit by an outside professional, typically one holding the RS or PRA credentials.  Associations that are more aggressive in the process prepare, in addition, annual updates without a site visit, resulting in an updated, static, paper report.  Some progessive associations and management companies have seen the limitations of this paper-based process, and buy RS software in an attempt to keep their capital budget analysis current and actually use it as management tool. 

For some smaller associations or those that don’t maintain complex or numerous common areas, this process may actually work.  But, for larger associations or those that maintain complex common areas, the above method will always fall short of expectations.

The RS report is nothing more than snapshot at a point in time of the long range plan for the maintenance, repair, or replacement of association common areas.  These are capital expenditures that do not fit within the annual operating budget. The Capital Reserve Study report is a budget that is part of a series of facilities maintenance activities. The RS report does not determine the maintenance plan; rather, it is a reflection of the maintenance plan.

Identifying the Disconnects in the Capital Reserve Study Process

Establishing a long-term maintenance plan is a major first step.  Removing the disconnects from the existing process is also necessary.  The primary disconnect is the failure to establish appropriate capital budgeting policies, which results in:

  • No policy on what items should be included in the analysis
  • No policy on who makes that determination
  • No policy on establishment of replacement cycles
  • No funding policies or goals
  • No policies on cash handling procedures
  • No policies on investment of reserve funds

In addition, identifying the correct software and capital budget consulting company are critical to this process.  The software determines how you can accumulate and use component data.  The capital budget consulting company determines the proper accumulation of data at the correct level.

Facilities Advisors, Inc. (FAI) is Redefining Reserve Studies

 At FAI we work with you to help you establish appropriate capital budgeting policies.  We discuss with you your funding goals, and your opinions regarding interest and inflation rates to be used in the funding plan.  Most importantly, we discuss with you how to set the scope of the study to produce the proper level of component detail so that the resulting reports will match your expectations.  Lastly, we provide you with our internet-based software so that you can continue to keep your component database updated as you make capital expenditures and make contributions to your capital replacement fund.

You will find that our RS reports and component database differ from what is commonly seen in the industry.  Others must accumulate components at a macro level; meaning many individual minor components are “grouped” into a single line item identified as a “component” for purposes of reporting in the RS report.  This is generally done for two reasons; (1) it is too much trouble to separately identify each of the “minor” individual components, and (2) the software used is incapable of reporting detail components in any meaningful fashion, as the detail would overwhelm the readers of the report.  Our software is capable of both providing sufficient detail, AND "rolling up" details into meaningful categories that are easily understood.  This is because of the sophisticated basic structure of our software, which contains multiple category levels for better reporting of information.  The complete description of the Facilities 7 software system is shown separately.