Community living can be incredibly rewarding – however, without proper capital planning, it can also come with unexpected, costly expenses. For property managers and condo board members, the ability to keep a reserve budget and plan for future expenses can help to extend the life of assets, manage upkeep, and ultimately save money. A reserve study makes the whole process clear and painless by providing directional guidance over the next 30 years.
What Does a Reserve Study Do?
A reserve study analyzes a community’s common components to determine the future need for repairs and replacements of assets. The reserve study presents cost and remaining useful life estimates associated with each of the capital projects. This capital planning tool helps property managers and boards understand both the physical and financial health of their community at the time of the reserve study and in the future. It enables community stakeholders to:
- Analyze the reserve fund cash flow to determine how much should be kept in reserves and how much the Association should contribute to reserves annually. The result is more realistic annual budgets.
- Minimize the risk of financial emergencies and additional assessments.
- Confidently anticipate future maintenance needs.
- Unify present and future members of the association and board by providing a long-term plan.
Your Reserve Study: The Ultimate Budgeting Tool
A reserve study acts as a roadmap to guide your budget process in the coming years. Understanding the useful life of each common asset, boards are equipped to prioritize and focus on near-term capital projects while budgeting for the future.
While a new reserve study should be conducted once every three to five years, the results should be reviewed annually when setting capital planning goals and preparing the budget.
This regular practice keeps property managers and board members in touch with capital project needs, as well as the appropriate reserve contributions necessary to support them. With consistent yearly reviews, communities can plan for long-term success and ensure they are financially positioned to address the community’s repair and replacement needs.
It is considered best practice for community associations, cooperatives, board members, and property managers to budget with reserves in mind so that they are prepared to address future capital expenses. Although financial statements, bills, service contracts, and past budgets can help guide other areas of the budget, the reserve study is the only true measure that can guide establishing appropriate reserve funding.
Legal Disclosures for Reserves and Requirements for Reserve Studies
Although it varies by state, there are specific requirements for reserve disclosures and reserve studies mandated by law. As you create your community’s overall budget, the reserve budget and reserve study should be a major factor. It’s the responsibility of the association or board to know the regulations in their state. Here are the following requirements for the DMV:
- District of Columbia:
- Section 42–1903.08: Power to adopt and amend a budget for revenues, expenditures, and reserves, and collect assessments for common expenses from unit owners
- Section 42–1904.04: Disclosure statement shall include the amount, or a statement that there is no amount, included in the projected budget as a reserve for repairs and replacement.
- No requirement for reserve studies to be conducted.
- Section 11-109.2: Annual budget must contain reserves.
- Section 11-135: For resales, a unit owner must provide the purchaser the current operating budget of the condominium including the current reserve study report or a summary of the report, a statement of the status and amount of any reserve or replacement fund, or a statement that there is no reserve fund.
- House Bill 254: Effective October 2020 (must comply by October 1, 2021) for Prince George’s County; Requires reserve studies to be conducted every 5 years, reviewed annually and the association or cooperative must provide funds to the reserve study in accordance with the reserve study.
- House Bill 567: Passed in the House and Senate in 2021 (must comply by October 1, 2022) for Montgomery County; Requires reserve studies to be conducted every 5 years, reviewed annually and the association or cooperative must provide funds to the reserve study in accordance with the reserve study.
- Outside of Prince George’s County and Montgomery County, there is no requirement for reserve studies to be conducted in Maryland (House Bill 313 did not pass in 2021)
- Condominium Act 55.1-1991 & Property Owners’ Association Act 55.1-1809: Resale certificates must include the current reserve study report or a summary thereof, a statement of the status and amount of any reserve or replacement fund and any portion of the fund designated for any specified project by the association.
- Condominium Act 55.1-1965 & Property Owners’ Association Act 55.1-1826: Must conduct a reserve study every 5 years, review the study at least annually to determine if reserves are sufficient, make any adjustments the board of directors deems necessary to maintain reserves, and disclose the findings and current accumulated reserves in the budget.
By Michael Lockhart
Michael is the northeast regional account manager for Reserve Advisors. As a regional account manager, he is responsible for providing clients throughout New England and the Mid-Atlantic with comprehensive reserve studies and customized funding solutions that meet the needs of sustaining their community associations in excellent condition. Michael is responsible for meeting with and educating managers and association boards on the process and benefits of having a professional reserve study. As an industry expert, he participates in seminars for industry partners including Community Associations Institute (CAI) and numerous professional management firms.