A reserve study is a long-term capital budget planning tool which identifies the current status of the reserve fund and a stable and equitable funding plan to offset ongoing deterioration, resulting in sufficient funds when those anticipated major common area expenditures actually occur. The reserve study consists of two parts: the physical analysis and the financial analysis. This document is often prepared by an outside independent consultant for the benefit of administrators (Board of Directors or Strata Council Members) of a property with multiple owners, such as a condominium association or homeowners' association (HOA), strata, containing an assessment of the state of the commonly owned property components as determined by the particular association's covenants, conditions, and restrictions (CC&Rs) and bylaws. Reserve studies however are not limited only to condominiums and can be created for any "common interest community" (CIC) properties such as resort (shared vacation ownership) properties, community/neighborhood associations, coops, etc.
Reserve studies are in essence planning tools designed to help the board anticipate, and prepare for, the property's major repair and replacement projects. For example, such projects would include: replacement of the roof on the building(s), replacement of the boiler, retrofit of the fire alarm devices, and resurfacing of the roadways.
In some jurisdictions across Canada, a reserve study is also sometimes referred to as a "reserve fund study", "contingency reserve fund study", or "replacement reserve study" and, in British Columbia, the legislation refers to this type of study as a "Depreciation Report".
Purpose
The purpose of a reserve study is to give those overseeing the maintenance of the property a better idea of what major expenses to expect and an educated estimate of when these expenses will occur. With this knowledge, the homeowners' association board or manager can create a budget so association members will make their fair share of reserve contributions†, designed to offset the slow but steady ongoing reserve component deterioration of the association assets, and avoid being surprised by components that deteriorated often in plain sight and over a number of years. In addition, the reserve study provides important annual disclosures to association members (and prospective buyers) about the condition of common area components, and the level of preparedness (strength) of the reserve fund (typically measured in terms of Percent funded). A HOA reserve study is a roadmap that allows decisions to be made which will be efficient and effective for the long term. The International Capital Budgeting Institute has established standards for calculating percent funded. There are three methods of making this calculation, and differences between reserve practitioners can, unfortunately, result in significant differences in the percent funded amount. (This reference returns the error "404 Page not found", but the methods used in cash-flow analyses don't give correct values anyway).
(† : Unfortunately, because inflation is incorrectly accounted for, anyone checking the fairness of assessments between years for a cash-low method study will find that recommended assessments cheat future owners to benefit current owners.
A reserve study for CICs should:
1. Provide budgeting information that gives some theoretical assurance that when common element replacement projects are due, sufficient funds will have been assessed to pay for them without special assessments (preferably without significant over-funding).
2. Fairly distribute inflated costs for replacement projects among owners, in proportion to their percent ownership of common elements (as defined in their association documents) for the duration of that ownership, as measured either in any year's constant dollars or in hours to earn at any pay rate assuming owner pay inflates at the same rate as component replacement costs.
3. Give a theoretically accurate percent funded based on the component cost inflation rate(s) used in the study.
If these three requirements are not met, the analysis is of little use to a condominium association; and current "cash-flow" methods cannot meet these requirements, because they cannot properly accounted for inflation.)