Reserve Studies FAQ

Below is from the National Reserve Study Standards and lists the basic categories of Funding Plan goals:

      Baseline Funding: Establishing a Reserve funding goal of keeping the Reserve cash balance above zero.

      Full Funding: Setting a Reserve funding goal of attaining and maintaining Reserves at or near 100% funded.

      Statutory Funding: Establishing a Reserve funding goal of setting aside the specific minimum amount of Reserves required by local statues.

      Threshold Funding: Establishing a Reserve funding goal of keeping the Reserve balance above a specified dollar or Percent Funded amount. Depending on the threshold, this may be more or less conservative than “Fully Funding.”

My goal is to encourage association board to adopt the Full Funding goal. Why? Inflation is the reason. If the Executive Summary funding percentage is at or near 100%, then the chance of a special assessment is extremely low.

The calculation for Ideal Reserves = Future Replacement Cost]/Useful Life* [Effective Age]

For example, if a component currently valued at $10,000 has a useful life of ten years, we can estimate the annual provision for the replacement fund at $1,000. By the end of year five, assuming no inflation, this component has accrued a liability of $5,000. This is commonly referred to as its “Ideal Reserve”.

Reserve Study providers are statutorily mandated by the State of California to perform the percent funded calculation. It is simply a comparison between the total ideal reserve and the total accumulated reserve fund. Expressed as a percentage, it indicates a measure of the overall financial strength of the Association.

The following “rule of thumb” standards for reserve funding percentages are offered for consideration. Again, there are no current legal requirements that mandate the Association maintain its reserves at any specific level; however, the Boards decisions should be made in compliance with the above mentioned standards, and acted upon in accordance with their fiduciary responsibilities to the Association and its members. A poorly funded Association may face serious consequences.

70%-100% funding is considered GOOD

30%- 69% funding is considered FAIR

0% – 29% funding is considered POOR

As provided for in Civil Code §5510(b), an association’s reserve study must contain the following reserve component details:

1. Components. The study must identify major common area components the association is obligated to repair that have a remaining useful life of less than 30 years. Examples are roofs, painting, pool heaters, asphalt repairs/replacement, etc.
2. Useful Life. The study must identify the probable remaining useful life of the components. These are estimates since it is impossible to know the true remaining life of each component. Lifespans will vary depending on (i) the original quality of the component itself and (ii) whether the association has a program of regular preventative maintenance.
3. Repair Costs. An estimate of the future replacement costs of components must be included. Inflation should be factored into the estimate.
4. Reserve Contributions. An estimate of the total annual contribution necessary to defray the cost to repair, replace, restore, or maintain the components identified in paragraph (1) during and at the end of their useful life, after subtracting total reserve funds as of the date of the study.
5. Funding Plan. The study must contain a reserve funding plan to pay for the future replacement of components. The plan might be through monthly contributions into the reserve fund or through a combination of contributions and special assessments.

The calculation is:       “Per Unit Monthly = Savings Per Month per Project/ (HOAs [Number of Properties]”

Each project has a determined monthly savings level for each HOA owner. When you add the individual monthly savings requirements for all projects, the result is the amount of money the owners should be saving each month to be “fully funded” going forward.

Your accumulated cash reserves are a pool of resources available at any time for any reserve component. It is important to note that a “line item” mentality should be avoided. A needed repair or replacement should not be postponed due to the lack of available reserves for that particular component. However, it must also be noted that reserve funds cannot be used for normal operating expenses and borrowing from reserves will trigger a legal process that should be guided by appropriate legal counsel.

California Civil Code Section 5550 requires an onsite visual inspection every three years. The inspection is conducted in accordance with the Association of Professional Reserve Analysts Standards of Practice and is limited to readily accessible components capable of being visually inspected. The results are intended to be used solely for budgetary purposes in the preparation of the Reserve Study.

The inspection does not involve any destructive or invasive procedures and expressly excludes any form of comprehensive physical inspection or structural, architectural, engineering, geological, or forensic examinations or analysis, or the identification of potential hazards. Also excluded is the discovery or determination of original or subsequent construction defects, the discovery or determination of any structural compromises, damage or deficiencies (including that caused by wood destroying organisms and encompassing stairs, decks, balconies, or any other elevated surfaces), conditions related to animals, insects, or other organisms (including fungus and mold), and any hazardous, or illegal substance, or the damage or health risks arising there from.

In addition, it is strongly recommended that all structural components (including stairs, decks, balconies, any other elevated surfaces and all related components) be thoroughly inspected at least annually by the appropriate engineering/construction professionals to ensure their integrity and compliance with relevant building safety codes. These inspections fall beyond the scope of our Standards of Practice and are expressly excluded from this engagement. It should also be noted that only Licensed Structural Pest Control Operators, under the Department of Consumer Affairs, are authorized to identify structural damage caused to wood by wood destroying pests & organisms.