The most equitable practice to pay for a major repair or replacement project for your homeowners association is to perform a reserve analysis, or reserve study. This is a primary fiduciary duty of the association’s board of directors and is usually a requirement of the governing documents.
A reserve analysis combines a physical analysis of the property and relevant governing documents to gain information on the physical status of the common elements and determine the association’s obligation for maintaining them, and a financial analysis that evaluates the association’s current reserve fund balance, its annual income and expenses.
The analysis establishes the life expectancy of each component in the common elements, considers the remaining useful life at the time the analysis is conducted, and associates a reasonable cost and timeline to conduct the project. The cost is usually represented in “today’s dollars”, although inflation and interest may be included. The reserve analysis will indicate the annual, and monthly, contributions required by each member owner in the association to ensure sufficient funds have accumulated to pay for the project when it is needed. By reserving such funds each year, the eventual replacement cost is fairly distributed among the owners that actually use the elements, rather than “penalizing” only the current owners, as would be the case if a special assessment is imposed.
Levels of Reserve Analysis performed include:
- Full Reserve Analysis – includes physical and financial analysis, along with a detailed visual observation of the property that includes considerable quantification measurements.
- Site Visit Update – a financial analysis, with a physical property inspection to verify the detail of a supplied component inventory list.
- Reserve Update (no site visit) – client submits the list of components, measurements and quantities. A financial analysis and report is completed based on the data provided, comparing this data to our database and local contractor/vendor estimates.
The final report includes the following:
- Research of supplied governing documents to determine common element responsibilities.
- An evaluation of the reserve starting balance, recommended contributions to the reserve fund, projected reserve expenses over the next 30 years, and the projected reserve ending balances.
- A listing of the components included in the analysis, the normal useful life of those components (taking into consideration the harshness of our high alpine environment), the remaining useful life, and the repair or replacement costs of those components in today’s dollars.
- Any sources or assumptions made in obtaining reserve analysis data.
- Other information used in creating the reserve analysis report, such as funding methods.
- Naturally, our utmost diligence, timliness, respect (especially for those in residence), and knowledge and experience (we are based in the high Rockies).
- Detailed and professional reporting with easy to understand content and supporting photographs. The report consists of 3 parts (to view a sample, please click on each part) –
- Information about your Reserve Study
- Spreadsheet data on the various models used
- Detailed list of components
A well prepared, well communicated, Reserve Analysis that is properly incorporated into your HOA’s budget will:
- assist the board in fulfilling their fiduciary duty to the association
- lower the likelihood of large, unexpected, and possibly financially destructive special assessments
- increase the association’s financial health and its presentation to lenders and insurance companies
- increase the value of each home in the complex, as well as its appeal to potential buyers
- assisit the HOA in conformance with federal taxation requirements
- satisfy state legal requirements
- comply with secondary mortgage market guidelines
- convey an increased sense of comfort for the owners in knowing that their association is being well cared for