What are the levels of reserve studies?
The different levels of reserves studies can be confusing to board and association members. In Washington State the Condominium Act (https://app.leg.wa.gov/rcw/default.aspx?cite=64.34) requires that associations keep their reserves studies up to date and follow a schedule of updates. Once the association completes their Level I study they then go to a revolving schedule of two Level III’s and then a Level II. As long as they continue to update their reserve study they would never have to perform a Level I again. Here is a description of the different levels:
Level I: Full Reserve Study. This is the most expensive reserve study because it requires the most work. Pacific Crest would create an inventory of all the common assets, their age and replacement costs. We would also interview the association manager and board members to determine problem areas and what the upcoming projects are. We would then walk the property and document with pictures the condition of the individual components. This information is used to conduct the Financial Analysis which includes the current Fund Status and build three funding models. A Level I Reserve Study is recommended when a previous Reserve Study is not available, or a substantial time has lapsed since the last study.
Level II: Update with Visual Site Visit. This study would be done in the 3rd year following the required Level III’s. This report updates both the Physical Analysis and Financial Analysis of an existing report. Pacific Crest would meet with the association manager and or board members to see how the physical components are performing. A onsite inspection is conducted to verify and/or make adjustments to the Component List, Condition Assessments, Useful Life and component Valuation Estimates. We will also look at the estimated replacement costs versus what the actual costs are and make adjustments. The Financial Analysis is also updated, including the current Fund Status and three funding plans (current, baseline and full funding). A Level II Report is required every three years as required by state law.
Level III: Financial update with No Visual Site Visit. This report updates the Financial Analysis only. The term can be confusing for a new association as the Level III studies will follow the Level I study the first time around. In Washington State association’s will perform 2 Level III’s then a Level II. The current Fund Status and Funding Plan is updated balances, contributions and information contained within a prior Reserve Study. The figures are then reviewed and entered into our software and the financial analysis is performed. A level 3 report is recommended to review, adjust and verify that the existing funding plan is accurate and suitable for current economic conditions.