What a reserve study tells you

What the document is

A reserve study is a professional assessment of the common-area components a community association is responsible for replacing, and of whether the money being set aside will cover them. It comes in two halves.

The physical analysis inventories every major component with a limited life and a predictable replacement cost — roofs, siding, paving, elevators, boilers, pool equipment, fencing, lifts, painting — and records for each one its estimated useful life, its remaining useful life, and its current replacement cost. Components are included when they are the association's responsibility, when they wear out on a knowable schedule, and when they cost enough to matter.

The financial analysis takes the current reserve balance and the current contribution rate and projects them forward, usually thirty years, against the replacement schedule the physical analysis produced. It tells you when the fund runs dry, and what contribution would prevent it.

Studies come at different levels of service: a full study with an on-site inventory, an update with a site visit, and an update from records only. The last is much cheaper and much weaker, and an association that has taken the cheapest option several times running has not looked at its own roofs in years.

Percent funded, and what it means

The headline figure is percent funded: the reserve balance divided by the "fully funded balance", which is the amount that would be on hand if every component had been saved for steadily across the life it has already used. A twenty-year roof that is ten years old should, on that logic, be half paid for.

Reserve study practitioners commonly describe associations above roughly 70% funded as strong, between about 30% and 70% as fair, and below about 30% as weak and carrying a materially higher risk of a special assessment. Those bands are an industry convention rather than a legal standard, and they are worth treating as a starting point rather than a verdict — a community at 45% with a credible plan to climb, and no major component due in the next five years, can be in better shape than one at 65% with a roof at the end of its life and no plan.

What matters more than the percentage is the shape of the projection. Look for the year the cash-flow line approaches zero, and look at what is scheduled immediately before it.

The funding plan

Studies usually present one of a few strategies, and the language is standard:

• Full funding — aiming at 100% funded. The most conservative and the most expensive in dues.
• Threshold funding — keeping the balance above a chosen floor, whether in dollars or as a percentage.
• Baseline funding — keeping the fund from reaching zero, and nothing more. It works until a component fails early, at which point there is no cushion at all.
• Statutory funding — meeting whatever the state minimum happens to be, which in some states is very little.

Then check the number that actually matters: is the association contributing what the study recommends? A study recommending a contribution the board has declined to adopt is not a funding plan. It is a record of a decision to defer the problem, and it is usually disclosed in a single line that is easy to read past.

What to check, in order

1. The date and level of the study. An old study, or a run of records-only updates, is itself a finding.
2. Components with little or no remaining life. Roofs, elevators and paving are the expensive ones. A roof at zero remaining years against a thin reserve is the classic special-assessment setup.
3. Actual contribution against recommended contribution.
4. The history of special assessments and dues increases, from the minutes. A community that has assessed twice in ten years will probably do it again.
5. Whether reserves have been borrowed for operating expenses. Legal in some states with conditions, and always worth asking how and when it will be repaid.
6. Deferred maintenance not in the study. Walk the property. Reserve studies describe components on a schedule; they do not always capture what is visibly failing.
7. Litigation and insurance. Pending construction-defect litigation, a large wind or hurricane deductible, or an inability to obtain adequate coverage can each dwarf everything in the reserve schedule.

The rules have been changing

State requirements differ substantially. Several states require associations to commission a reserve study and to update it on a fixed cycle — California, for example, requires a periodic visual inspection and an annual review, and requires the funding position to be disclosed to members each year. Others require nothing at all.

Florida has moved furthest and fastest, introducing milestone structural inspections and structural integrity reserve studies for condominium buildings of three storeys or more, and restricting the long-standing practice of voting to waive reserves for structural components. That legislation has been amended more than once since it was first passed, so check the current statute rather than any summary of it, including this one.

There is a lending angle as well. Agency condominium project review has long expected an association's annual budget to allocate a meaningful share — 10% is the figure commonly cited — to reserves, and projects with inadequate reserves, deferred maintenance or unresolved structural findings can become difficult to finance. That matters even if you are paying cash, because it decides who can buy the unit from you later.

How to get hold of it

If you own, the study is your document — request it from the board or the management company, along with the last two years of budgets, the last twelve months of minutes and the current reserve balance.

If you are buying, the reserve study normally forms part of the resale disclosure or association document package, and most states give you a defined period to review it and, in some cases, to withdraw. That review window is short. Ask for the documents the day the contract is signed rather than the week they are due, and read the minutes as well as the study — boards discuss the roof long before they budget for it.

Two things worth doing with what you find. First, treat a likely special assessment as a real cost of ownership and set money aside for it, rather than discovering it in a letter. Second, if you are considering any work of your own — an accessory dwelling unit, a service or panel change, anything touching a shared wall, roof or electrical service — read the governing documents before you spend a dollar on design. Many associations prohibit it outright, and that is a cheaper thing to learn early.