A reserve study is an evaluation of a property’s physical components and an analysis of its reserve funds. Based on a thorough on-site inspection, a reserve study details anticipated replacements of repairs to common elements and recommended annual reserve funding to cover capital expenditures for the next 30 years. The goal is to provide recommended reserve contributions that provide enough funds to cover the major expenses while also avoiding overfunding.
A reserve study includes two basic components: physical analysis and financial analysis.
Reserve components are association maintained major property components with a determinate useful life. The analysis of the reserve components results in accurate and supportable annual reserve fund contributions.
What do we mean by “determinate useful life”? A property component has a determinate useful life when it has a finite expected service life based on normal wear and tear or obsolescence. An example of a component that does not have a determinate useful life would be the structural frame of a building.
What do we mean by “major” property component? A major property component is a capital (high dollar) expenditure. Major expenditures often occur within extended timeframes rather than daily, weekly, monthly or annually.
Reserve components are not homeowner components, minor expenditure components, general maintenance or regularly scheduled (daily, weekly, monthly, annually) activities. Homeowner components include those items where maintenance or replacement is the direct responsibility of the homeowner, and items that the association maintained items where the expense is billed back to the homeowners.
As a board of a community association, your actions or inactions have an impact on yours and the members’ financial well-being now and in the future. The board has a fiduciary responsibility to maintain the common property of the association. The board’s focus should always be the SAFETY of the residents and visitors, the INTEGRITY of the buildings and grounds and the PRESERVATION of property value.
Properties that are well funded are going to be proactive and less likely to defer maintenance. Inadequate funding can lead to deferred maintenance, which compromises the safety, integrity and preservation of the community.
Beyond the reserve funding recommendations, your reserve study can also help you prioritize projects and can save the association money.
Often times, especially in an older property, multiple components reach the end of their useful life around the same time. It’s usually not feasible, either from a financial or a project management standpoint, to conduct all the work at once. Your reserve study should provide guidance to help the board make a decision on which project(s) to prioritize.
There are several ways your reserve study can help the Association save money:
Minnesota Statute 515b.3-1141 Replacement Reserves
Minnesota Statute 515b.3-114 Reserves, Surplus Funds
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