Reserves provide the funding necessary to maintain, repair, replace or restore major common area components (such as paint, pavement and roofs) in the future.  Ideally, all future reserve item expenditures will be covered by those funds currently set aside in segregated accounts as reserves.

The reserve study is a budget planning tool which identifies the current status of the reserve fund and a stable and equitable funding plan to offset the expected future major common area expenditures.  The reserve study consists of two parts: the Physical Analysis and the Financial Analysis.

As of January, 2012, HOA’s and Condominium Associations that are not exempt must have a reserve study.

No, the law requires that a reserve study professional such as the Reserve Study Analysts from Pacific Crest Reserves perform the study. In reality the reserve study is complex and requires a 30 year outlook. This is a complex process that requires numerous calculations, estimation on component life and a 30 year projection. Most association members don’t have the background or tools to accurately create the study. Our analysts have  construction and building inspection backgrounds. The studies conform to the requirements developed by the Community Associations Imitative (CAI).

In the 2012 changes to the law an association with significant assets must have a reserve study. They also added an exemption for small associations:

“if the cost of the reserve study exceeds five percent of the association’s annual budget, the association does not have significant assets, or there are ten or fewer homes in the association.”

The physical analysis is a component study of the major common area components.  It consists of:

  • component listing
  • current cost estimate for each component
  • useful life estimate for each component
  • remaining life estimate for each component
  • field report or condition assessment

The financial analysis is a funding study that utilizes information in the physical analysis to determine:

  • reserve allocation (proposed budget for next fiscal year)
  • percent funded (strength indicator)
  • cash flow analysis (projection or forecast- a test of the allocation)

The reserve allocation is the amount to be annually budgeted towards reserves based on a Funding Plan.  The reserve allocation is a significant part of the overall budget, and therefore, considered a critical element of the funding study.

The funding plan is a primary part of the financial analysis that consists of a funding method and a funding goal.

When ever the board determines there are insufficient for the maintenance or repair of a common asset.

Various funding methodologies have evolved to determine this allocation, however, the component method dominate most reserve study reports.

The cash flow method determines reserve allocation by projecting reserve allocations and disbursements over a time frame of thirty years and testing different allocations until a minimum allocation is found that maintains a Percent Funded or Net Reserve Balance amount above a specified funding goal (perhaps a Net Reserve Balance of zero dollars for Baseline Funding).   This method provides for “collective funding” of all components.

Independent of methodology utilized, the following represents the basic categories of funding plan goals:

  • Baseline Funding– Maintaining a Net Reserve Balance at or near zero.
  • Full Funding– Maintaining a Reserve Balance at or near Percent Funded of 100%.
  • Threshold Funding– Establishing and maintaining a set Net Reserve Balance or Percent Funded.
  • Level 1 Reserve Study (Full) – A Reserve Study in which the following five Reserve Study tasks are performed:
    • Component Inventory
    • Condition Assessment (based upon on-site visual observations)
    • Life and Valuation Estimates
    • Fund Status
    • Funding Plan
  • Level 2 Reserve Study (Update, With-Site-Visit/On-Site Review) – A Reserve Study update in which the following five tasks are performed:
    • Component Inventory
    • Condition Assessment (based upon on-site visual observations)
    • Life and Valuation Estimates
    • Fund Status
    • Funding Plan
      *Note- Updates are reliant on the validity of prior Reserve Studies.
  • Level 3 Reserve Study (Update, No-Site-Visit/Off-Site Review) – A Reserve Study update with no on-site visual observations in which the following three tasks are performed:
    • Life and Valuation Estimates
    • Fund Status
    • Funding Plan

The state of Washington stipulates a  cycle of reserve studies and updates. These necessary updates provide statutory compliance and allow for adjustments due to actual year-end reserve balance and the unpredictable nature of the lives of many of the reserve components under consideration. Professional reserve study analysts have to perform onsite updates at least every three years to be in compliance with the law.

There is no set prices as there a number of variables that determine cost: number of units, what common assets are there, age of buildings, location, time of the year and type of study. For a very small association with few assets the price could be as low as $1,500 to $3,500 for a large association with assets such as pools, weight rooms, tennis courts, laundry etc. Prices increase with large assets, of different types, with more history to review and reconstruct, the difficulty factor begins to increase.

No, they will not. As the reserve study will tell the association when the components will need replacement or repair and what the costs will be. Its up to the board to determine when a special assessment is necessary.

It depends on the individual needs of the association. Determining an appropriate level of funding is unique as each association will have a particular view of what is acceptable for their own particular circumstances. Some association are willing to take on more risk than others.

In the context of funding levels the term “percent funded” is often used. This is a measure of current reserves compared with accumulated depreciation of common area components. It refers to the level of an association’s actual reserves compared with the fully funded balance, expressed as a percentage. The percent funded level can also be used to define an acceptable level of reserve funding and to set goals for associations to improve the level of their reserves.

Currently in Washington State its not required. However, if a condominium building is 3 or more stories in height and more than 10 years old,  we highly recommend a structural  inspection” be performed by a licensed architect or engineer. This inspection compliments the visual inspection we do every 3 years.  If the building is within 3 miles of the coastline, we recommend that the engineering inspection occurs every 10 years  from the date of construction.

SIRS stands for structural integrity reserve study. The structural integrity reserve study must address: roofs; load bearing walls or other primary structural members; floors; foundations; fireproofing and fire protection systems; plumbing; electrical systems; waterproofing and exterior paint; windows; any other item which exceeds $10,000.00 in deferred maintenance cost and was identified by the engineer or architect performing the inspection portion of the structural integrity reserve study.