Reserve Studies
What is a Reserve Analysis?
A reserve study is broken down into two basic parts, the “Physical Reserve Analysis” and the “Funding Financial Analysis”. All studies start with input from the association in which we detail their fiduciary responsibilities and compliance of State of Florida statutes.
The Physical Reserve Analysis is completed during the field site-visit of the association property, and it provides for the identification and quantification of the components to be reserved for such as roofing, painting, interiors, elevators, restoration, mechanical systems, paving, and recreation facilities. During the site visit we estimate the useful lives and the remaining useful lives for each of the components in all the reserve categories. We complete a pricing procedure either by unit cost or cost in place to determine estimated replacement cost for each component. We use all this information to establish the ideal 100% financial need of each component in each reserve category.
The Funding Financial Analysis is the second part of the reserve study. We analyze the differences between the financial needs established during the physical analysis and the association’s current reserve fund balance available to determine future funding requirements. Calculations are completed for each reserve category and each component within that category if using the “Straight-line/Restricted Funds” method. Otherwise, if using the “Pooled Reserves” which is the funding for multiple categories/assets which are combined into one general account from which you pay all expenses. In both methods, a cash flow procedure for each category details the anticipated reserve repair/replacement along with the estimated replacement cost amount for each of the individual years over the next 30 years. The association/coop’s annual reserve balances increase with the Normal Annual Reserve Contribution dollars as established in the physical reserve analysis and are supplemented by additional deficit funding dollars “if needed” in order to maintain a positive yearly cash flow.
We use threshold funding methodology with a thirty-year cash flow analysis to determine future funding. This method uses all funds in each reserve category making all funds available at any time for any of the individual components in that individual reserve category. We find this method allows some flexibility for funding future unanticipated reserve expenditures. The minimum threshold balance is usually set at approximately 10% of the operating revenues but can be more depending upon the circumstance.
Our reports meet all State of Florida statute requirements in an easily understood format. We recommend reserve studies be updated annually, with a physical field inspection of all the components every third year to keep pace with inflation and reserve expenditures that have taken place.
Purpose of Reserves
Every association/coop should strive for a strong stable financial position. Adequate reserves are important in maintaining financial stability. A reserve program is a long-term planning tool designed to provide all or part of the funds necessary to pay for maintaining, repairing, and replacing the capital improvements of the association. Reserves are funded with monthly or quarterly payments to meet future required expenses to maintain the association/coop’s assets.
Reserves are monies budgeted, collected, and set aside for replacement or deferred maintenance of the capital improvements and assets for an association. The establishment of reserve accounts can begin with the developer and/or the board who has a fiduciary capacity and responsibility for the establishment of the association’s budget. Most board members know it is prudent and fiduciarily incumbent upon them to collect and have a reserve analysis completed and accordingly have engaged an independent specialist to prepare a reserve scheduled for the inclusion in the association/coop’s budget.
For condominiums and cooperatives, the State of Florida states that a budget must include reserve accounts for capital expenditures and deferred maintenance. These accounts must include, but are not limited to, roof replacement, building painting, and pavement resurfacing, regardless of the amount of deferred maintenance expense or replacement cost, and any other item that has a deferred maintenance expense or replacement cost that exceeds $10,000.
Most members of community associations have become aware of the necessity of reserves being included in the budget. Without reserves, owners may be subject to either special assessments or may not be able to repair or replace the common area assets. If there are no reserves, the risk of reduced property values in a community is an absolute possibility. Reserve funds enable an association to maintain the common areas by reducing the risk of special assessments and thereby minimizing the impact of financial challenges to the unit owners. The establishment of 100% reserve funding ensures the owners of the following.
- Establishes and preserves reserves for a strong financial position to meet future expenditures.
- Reserves reduce the probability for special assessments.
- Reserves reduce the potential for reduction in unit/home property values.
- It allows for the replacement/maintenance of the association’s assets over a period of 20 to 30 years according to the remaining life estimated.
- All owners share the expenses of the association “equally/equitable” by paying their fair share of the cost while living in the association.
Reserve funding is for TODAY’S asset depreciation collected either monthly, quarterly, semi-annually, or annually. Every day the sun and wind are decomposing the roof and building, friction is wearing down the elevators, and car tires and nature are cracking the asphalt. The daily depreciation will eventually require the replacement or maintenance of these assets.
Adequate funding is the key to reserves. Just having reserve funds does not make an associations’ financial future strong. Reserves must be set at an annual goal of 100% funding according to Florida Condominium and Cooperative Statutes. A proper asset funding plan is the same for all condominiums, cooperatives, homeowner associations, and various other types of associations. For Homeowner Associations with statutory reserves, the membership can elect to partially fund reserves or waive reserve funding altogether by a majority vote of its membership. J.R. Frazer, Inc. does not recommend anything less than annually fully funding reserves.
As per Florida Statutes: The members of a unit-owner-controlled association/coop may determine, by a majority vote of the total voting interests of the association/coop, to provide no reserves or less reserves than required by this subsection. For a budget adopted on or after December 31, 2024, the members of a unit-owner-controlled association/coop that must obtain a structural integrity reserve study may not determine to provide no reserves or less reserves than required by this subsection for items listed in paragraph (g), except that members of an association operating a multi-condominium may determine to provide no reserves or less reserves than required by this subsection if an alternative funding method has been approved by the division.
By annually fully funding reserves, the association will have the monies set aside to pay and replace the components/asset items listed in a reserve study based on the estimated remaining lives of each of the assets. There will be cost variances when it comes time to having the component items replaced/maintained due to inflation, code changes, and or upgrades. At the time of replacement, the association should obtain 3 bids from various vendors and accordingly choose a vendor that will best accomplish the goals of the association.
Lastly, not every circumstance can be accounted for such as future loss possibilities from catastrophic disasters. Other items that typically come up in conversation with associations are drainage, underground piping, landscape, lakeshore restoration, and storm related costs. Though these items are typically not a part of reserve studies, a reserve specialist may include these items for the fact that all of these will occur at one time or another during the life of the community – especially in HOA communities. These items should be discussed with your reserve specialist/analyst.
Levels of Service for Reserve Studies
There are 3 types of reserve study services we provide to our clients. Please keep in mind that for each of the 3 services provided, all information such as pricing, useful life, remaining life, replacement costs, current reserve balance, and any other important information used is analyzed and updated.
- Full Reserve Study which includes a Site Visit (Traditional and SIRS)
This is the first time a reserve analyst from our company will visit your association to gather the required information to prepare the report. The reserve analyst will measure and count all your assets/components. They will measure your building (exterior and common area interiors), measure your paving, count all the light poles, make inventory of mechanical items, etc. Through visual observation, they will determine an approximate remaining life of each of the individual assets. Some of this information is also obtained by your association through the property manager. These items may include contracts/proposals for a roof replacement, painting, and or mechanical change outs. All this information will be included in the Physical Analysis section of the reserve study. This reserve study is the costliest of the 3 types of reports due to the initial time required to gather and complete the physical analysis part of the report. - Reserve Study Update “with” a Site Visit (Traditional and SIRS)
Once the Full Reserve Study is completed, every other future on-visit is considered a Reserve Study Update. A reserve analyst must come out to the site once every 3 years and re-evaluate the assets of the association. Information is again gathered not only from the on-site visit, but also from the property manager on any work that might have been completed since the last reserve study was completed. During this visit, certain items may be re-measured and or re-counted – but not always. This is usually less time consuming hence the cost of the update is much less than the full reserve study during the first site visit.
Though this reserve study is usually only ordered once every 3rd year, it may be required to be ordered sooner. Major concrete restoration and or interior renovation projects may trigger an earlier site visit than is typically required. A major new asset that has been added to the association/coop can also trigger an earlier site visit. - Reserve Study Update “without” a Site Visit (Traditional and SIRS)
This annual update is completed for the next 2 years after the last on-site reserve study. No site visit is conducted. The reserve analyst will request all contracts/proposals on work that has been completed or work that will be completed in the near future since the last reserve study. All pricing/unit cost will be adjusted for inflation, remaining lives will be adjusted, and the current reserve balance will be updated to arrive at a new annual fully funding reserve contribution. This is the least costly of all the 3 reports due to the time involved in completing the report.
Parts of a Reserve Study
A reserve study is broken down into two basic parts, the “Physical Reserve Analysis” and the “Funding Financial Analysis”. All studies start with input from the association in which we detail their fiduciary responsibilities and compliance of State of Florida statutes.
The Physical Reserve Analysis is completed during the field site-visit of the association property, and it provides for the identification and quantification of the components to be reserved for such as roofing, painting, interiors, elevators, restoration, mechanical systems, paving, and recreation facilities. During the site visit we estimate the useful lives and the remaining useful lives for each of the components in all the reserve categories. We complete a pricing procedure either by unit cost or cost in place to determine estimated replacement cost for each component. We use all this information to establish the ideal 100% financial need of each component in each reserve category.
The Funding Financial Analysis is the second part of the reserve study. We analyze the differences between the financial needs established during the physical analysis and the association’s current reserve fund balance available to determine future funding requirements. Calculations are completed for each reserve category and each component within that category if using the “Straight-line/Restricted Funds” method. Otherwise, if using the “Pooled Reserves” which is the funding for multiple categories/assets which are combined into one general account from which you pay all expenses. In both methods, a cash flow procedure for each category details the anticipated reserve repair/replacement along with the estimated replacement cost amount for each of the individual years over the next 30 years. The association/coop’s annual reserve balances increase with the Normal Annual Reserve Contribution dollars as established in the physical reserve analysis and are supplemented by additional deficit funding dollars “if needed” in order to maintain a positive yearly cash flow.
We use threshold funding methodology with a thirty-year cash flow analysis to determine future funding. This method uses all funds in each reserve category making all funds available at any time for any of the individual components in that individual reserve category. We find this method allows some flexibility for funding future unanticipated reserve expenditures. The minimum threshold balance is usually set at approximately 10% of the operating revenues but can be more depending upon the circumstance.
Our reports meet all State of Florida statute requirements in an easily understood format. We recommend reserve studies be updated annually, with a physical field inspection of all the components every third year to keep pace with inflation and reserve expenditures that have taken place.
