As a community manager, one of the services we provide is to facilitate determining an appropriate Reserve Fund for the annual budget. The purpose of a reserve fund is to repair, replace, restore, or maintain the major common area components. Civ. Code §5510(b); §5565(b)(1)
A detailed inspection by a professional followed by a report & plan is known as a Reserve Study. The reserve study process can be simplified as follows:
- A reserve company retained by the board identifies all major common area components, the cost to repair/replace them, and their remaining life span.
- The reserve company calculates how much money is needed and when.
- The board decides how to fund the reserves--whether through increased assessment contributions, special assessments or a combination of the two.
- The funding plan is annually disclosed to the membership in the year-end budgeting process.
Is a Study Required? All associations, regardless of size, are required to prepare a reserve study unless the total replacement costs are less than 50% of the gross budget of the association, excluding the association’s reserve account for that period.
What about Small Associations? Small residential associations, even as small as two units, must perform reserve studies if they have common areas--unless the total replacement costs are less than 50% of the annual gross budget.
How Frequently Should we do a Study? At least once every three years, the board of directors shall cause to be conducted a reasonably competent and diligent visual inspection of the accessible areas of the major components that the association is obligated to repair, replace, restore, or maintain. A reserve study is not actually a "study" of the roofs, boilers, streets, etc. Instead, it is a list of the major common area components with an estimate of their remaining useful life. Reserve studies should be done by someone who specializes in reserve studies.
A Reserve Study must contain the following Reserve Component Details:
- Components. The study must identify major common area components the association is obligated to repair that have a remaining useful life of fewer than 30 years. Examples are roofs, painting, pool heaters, asphalt repairs/replacement, etc.
- Useful Life. The study must identify the probable remaining useful life of the components. These are estimates since it is impossible to know the true remaining life of each component. Lifespans will vary depending on (i) the original quality of the component itself and (ii) whether the association has a program of regular preventative maintenance.
- Repair Costs. An estimate of the future replacement costs of components must be included. Inflation should be factored into the estimate.
- Reserve Contributions. An estimate of the total annual contribution necessary to defray the cost to repair, replace, restore, or maintain the components identified in paragraph (1) during and at the end of their useful life, after subtracting total reserve funds as of the date of the study.
- Funding Plan. The study must contain a reserve funding plan to pay for the future replacement of components. The plan might be through monthly contributions to the reserve fund or through a combination of contributions and special assessments.
At PMI Del Mar it’s our opinion that an independent, credentialed reserve analyst is the best option to complete this task. The Community Associations Institute (CAI) issues a "Reserve Specialist" credential to qualified individuals. There is a similar credential called the "Professional Reserve Analyst" administered by the Association of Professional Reserve Analysts.
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