Pacific Crest prides itself on the fact that we will take the time to educate board and new association managers.
There are concepts, terminology and formulas that we utilize in completing a reserve study. More in depth articles can be found in the Reserve Studies area of this site which is a great resource for industry articles written by professional reserve analysts.
What a Reserve Study Is and What a Reserve Study is Not
There is often confusion with Board Members and other Vendors as to what the reserve study is and what it is not. Below is a breakdown of what you should expect of a reserve study when ordering for any Association you are working with:
A Reserve Study Is:
A budgeting tool utilized by an Association for the long term allocation rates to the reserve account.
A timeline for expected common area expenses and it provides related expenses for these common area expenses.
An indicator of where the Associations funding level is in relation to the reserve account balance.
A Reserve Study Is Not:
It is not the annual recommended budget or a document to rely on for annual maintenance expenses – a reserve study may give guidance for the ongoing maintenance of some common areas in order to maximize or extend the useful life of the component (e.g. remove oil stains from asphalt, carpet cleaning or pressure washing recommendations) but there is not related costs for these recommendations.
The reserve study is not a comprehensive building inspection, engineering report, an instrument to perform exhaustive testing and does not provide the reasons for common area component failures.
The reserve study does not provide recommendations for upgrades or replacement of components unless they are required to meet code, energy or safety requirements. An example of this would be replacing chain link fencing with a costly decorative wrought iron fencing as this would typically be considered a capital improvement and not a reserve expense.
Lastly a reserve study is not set in stone but is an evergreen document that will change with yearly updates. The component list, their related costs and their related useful life expectancy will change with time as a history of actual expenses is developed and replacement costs are established.
Most associations will have two or more accounts established with at least one being the operating account and the other being the reserve account. The reserves may also be held in long term bonds, CDs and money market accounts. etc. They are used as below:
Operating / Maintenance Account: pays for ongoing maintenance expenses related to items such as insurance, utilities, maintenance of common area such (e.g. mowing the lawn & cleaning the pool). The operating account is often set up with the bank under a checking account as there is a lot of activity from this account and money is constantly moving in and out of it.
Reserve Account(s) : pays for common area expenses related to larger scale replacement and repair that are less frequent but tend to be more costly. This would include common asset replacement expenses such as roofing, exterior paint, pool resurfacing, etc. Associations will also use longer term products such as bonds, CDs or money markets.