Why is a Reserve Study Important?

A reserve study serves as an extremely helpful tool for community associations. The reserve study provides direction and an in-depth analysis of community assets and serves as a financial guide for the community. Without this tool, the Board and community would essentially progress blindly through the years without a plan. As a concrete guide it helps communities plan and save for capital projects that could occur over a 30-year period. Associations should update their reserve study every one to three years.

It’s important to have the community reserve study completed by a professional who specializes in the community association industry. Companies that support organizations like Community Associations Institute are some of the most recommended. Sometimes smaller or financially restricted associations have tried to utilize someone in the community to handle this task.

In conversations with community members I hear, “We can walk the grounds ourselves and make notes of what needs to be done. Then we will create an Excel spreadsheet of capital projects.” This is not a best practice for community associations. The maintenance and financial component, if evaluated and analyzed incorrectly, could severely cost the association in the long-run. Hire an expert for your reserve study.

As underwriting guidelines and expectations change in the insurance industry, more insurance carriers require a reserve study to be submitted for review. It provides knowledge for an association on sustainability and offers insight on the community’s insurability. For example, if the roof is 25 years old and the reserve study says replacement will be in nine years, the insurance carrier must see proof of annual maintenance and inspection because the roof is over 20 years old.

Boards can also use the reserve study strategically. Inspections such as building envelopes or structural inspections may be included in the study, so the community has the money allocated to pay for them. The plumbing replacements for the building, including those that are the responsibility of unit owners, may need to be incorporated in the association’s reserve study. As buildings age, components need to be replaced. Insurance companies want to avoid paying for water damage events when they could be prevented. It is becoming harder for communities with aging buildings and outdated plumbing to find insurance.

Full plumbing projects are costly and not always fiscally feasible. As an option, communities could consider interim unit inspections to look for active leaks. With potential problems identified, they can be added to the reserve study and planned updates can be made. If owners were aware of active leaks found during an inspection, communities could prevent a large and costly claim.

Inspections made now may save claim damage and ultimately insurance premiums in the long-run. A reserve study and the data it provides is crucial for long-term sustainability of any community.