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Reserve Studies for Small Associations PDF Print E-mail

by Wolf Peddinghaus, HausFS

A reserve study is the process by which the condo association board anticipates and prepares for major common area expenses.  Whether it is the roof that needs to be replaced in 5 years, the boiler in 10, or the mortar in 15, common areas will deteriorate over time and will require repair or replacement.

Performing a reserve study will give the Board a general time frame when the common areas elements will need replacing and about how much it will cost.  Because the reserve study informs the Board of common areas that will need repair or replacement, the goal is to set aside and collect enough regular reserve contributions to offset all common area expenses.  Correspondingly, special assessments should only be used in cases of true emergency and not for expenses that could have been anticipated.

Unfortunately, the high cost of reserve studies, more often than not, prohibits smaller condo buildings from having a complete reserve study performed.  It’s generally counter-productive to spend thousands of dollars to figure out how much you should be saving!  While a full-service reserve study may be out of reach, the Board can take steps to perform their own projections. 

The first step is to determine which common area components to include.  The Board will need to determine if certain common area components are considered “common elements” or “limited common elements.”  Limited common elements can be excluded from the reserve study, as the expense to repair and maintain them resides with the individual unit owner.

Once the Board determines which common area components to include (roofs, boilers, garages, etc) the next step is to contact vendors to inspect the individual components.  For example, you’ll need to have an expert inspect the roof to determine estimated useful life.  This may be a roofing company or an inspection company. If you already have annual maintenance or inspections in place for certain systems (such as the boiler) your service company should be able to provide an estimate of the component’s remaining useful life.

The next step is to research the present day cost of repair or replacement.  For example, if the boiler has about five years of useful life remaining and the estimated cost to replace the boiler is $5,000, then about $1,000 needs to be collected per year for the next five years.  Include a bit of padding to account for inflation.  The actual cost may differ from the projected cost, so keep this in mind when preparing the calculations.  If the boiler lasts six years then there is more than enough set aside in reserves to replace it.  On the other hand, if the boiler only lasts three years, then the Board will need to create a special assessment to collect the difference between what has been set aside in the reserves and the actual cost.

When preparing the annual budget, the Board should include a line item for reserves for each common element.  If you’ve determined that you’ll need to put aside $1,000 each year for ten years to replace the roof, $1000 each year for six years for the hot water heater, and $500 each year for five years to maintain the fire extinguishers, the total annual reserves will be $2500.  In order to ensure that the reserves are actually saved, the Board will need to keep an eye on any expenses that pop up that are not included in the budget, and create a special assessment if necessary for those items.  Refrain from using reserves that have been set aside for deferred maintenance per the budget, or you will quickly find those funds depleted.

For smaller condo buildings, performing a self-conducted reserve study is a cost effective way to estimate the anticipated major maintenance, repair, and replacement costs of common elements.   Building reserves into your budget to cover these less frequent but substantial expenses will offset the need for large special assessments when the work needs to be done.
 

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