Associations that own buildings, housing different occupants are required by law to keep some reserve monies for the maintenance of common areas and facilities. This money is known as a reserve fund, and the study or analysis involved in determining the value of the fund thus required is known as reserve analysis or reserve study. This article sets out the process of performing this analysis to arrive at an acceptable figure for the fund, setting out each occupant’s annual contribution and the long-term projections for anticipated deterioration of the building.
The reserve analysis involves a physical and a financial assessment of the commonly shared facilities and components of the housing project to determine their value, the rate of deterioration, expected future date when the item will need money and how much it will require for restoration. Every association is required to have this reserve study performed, and size is not a factor in the requirement for a reserve funding scheme, as money must be put aside to fund restorations and repairs.
As mentioned above, the process of performing reserve study techniques is three-fold:
1. The Physical Analysis
During this phase, each asset is analysed individually and its value determined at the time of study and also its expected future date when the wear and tear will need to be replaced. Each commonly shared asset including swimming pools, driveway, sports courts and recreation parks, roofs and gates are assessed individually.
The resultant report will show how much life the asset still has before it’s due for replacement and also what factors will determine the time to replace it. The analysis report is very comprehensive since it forms a base for determining the financial value attached to the replacement or restoration of each asset.
2. Financial Analysis
In phase two of the reserve analysis, the results of phase 1 are used together with other projected future costs like currency values and projected cost of materials. The financial analysis will determine how much in contributions will each tenant pay towards the reserve fund. The figure is arrived at by first determining how much is in the reserve fund and how much is projected to be needed in the future among other factors like the total number of members of the said association. The total fund is then broken down to yearly contributions for each member and any recommendations on how else the reserve kitty may be financed.
3. Presentation to the Board
In the third and final phase, the completed results of the reserve analysis are presented to the Association board for approval and adoption. The whole study analysis covers a number of years into the future detailing expected life expectancy and associated expenses of each item in the asset list.
Performing a reserve study of any building complex is important as it helps to put into perspective expected expenses in the future and also take into consideration any outstanding loan repayments when determining the financial contributions of the tenants. This study plays a pivotal role in any future funding considerations by financial institutions. It is not a wonder then that in some states like the state of Washington in America, maintaining an updated reserve analysis is a statutory requirement enforced by the Federal Housing Authority.