Tutorial – Physical Analysis

Tutorial Introduction
Component Life and Cost
Financial Analysis
Reserve Funding Strategy
Calculating Balance

The physical analysis is the cornerstone of the Reserve Study. It is based around the “site inspection.” When inspecting the property, Pacific Crest  will analyze and inventory all of the association’s “common area components” to determine which components warrant reserve funding.

Some what are these common components?  Generally speaking, a reserve component must pass a four-point test (designated by the CAI National Standards) in order to qualify for reserve funding. The following are the four points:

  • Must be a common area asset
  • Must have a life between 6 and 30 years
  • Must have a predictable remaining useful life
  • Must be above $500 or 1% of the annual budget

A little confusing right? In most associations, owners buy from the interior walls in. The association owns from the walls out. Doors, windows, trim, walls, gutters, driveways or parking lots, lights, elevators, stairs, retaining walls or bulkheads are typical building components. Other major items may community meeting rooms, laundries, tennis courts, weight rooms, and pools or hot tubs.

Components can be excluded from the reserve study only if individual homeowners, not the association, are responsible for their replacement. In any association, there may be “exclusive use common areas” that individual homeowners must maintain. Defined as common area items used exclusively by individual units (e.g., decks and patios), these areas are usually identified in the association governing documents known as the Covenants, Conditions, and Restrictions (CC&Rs). The CC&Rs should also make clear the maintenance responsibility of the association and homeowners for these items. With the guidance of their CC&Rs, the board should make a separate list of exclusive use common area components and decide who should bear the responsibility for maintaining these items. If the association has responsibility for maintaining these items, they should be included in the list of major components and be given a line item in the reserve budget.