What does a reserve study actually contain?

On this page

1. The two halves
2. Part one: the component inventory
3. Part two: the condition assessment
4. Part three: life and valuation estimates
5. Part four: the fund status
6. Part five: the funding plan
7. What else to expect
8. Using it

A reserve study arrives as a bound report or a PDF of fifty to a hundred pages, and most of it is tables. Board members who have never read one tend to flip to the page with the recommended contribution and stop there. That number only means something once you know what sits behind it, so here is the report from front to back.

The two halves

The Community Associations Institute’s National Reserve Study Standards, which most firms in the United States follow, divide a reserve study into a physical analysis and a financial analysis. The physical half answers “what do we own, what shape is it in, and what will it cost to replace?” The financial half answers “how much should we have saved by now, and how much should we put aside each year?” Every section of the report belongs to one half or the other.

Part one: the component inventory

The inventory is the list of everything the association is responsible for that will wear out. The standards use a four-part test for whether something belongs on it: the association, not the owner, has to maintain it; it has a limited useful life; that life can be predicted with reasonable accuracy; and the cost to replace it is above a minimum threshold the firm sets, so that small items stay in the operating budget.

A typical inventory for a mid-sized community runs to forty or sixty lines: roofing by building, asphalt paving and seal coating, concrete flatwork, exterior paint, siding, fencing, pool plaster and equipment, clubhouse HVAC, elevators, fire alarm panels, irrigation controllers, entry gates and so on. Each line carries a quantity and a unit, such as 42,000 square feet of asphalt or 6 elevator cabs. The inventory is the backbone of the study: a component that is missing from it is a component nobody is saving for.

Part two: the condition assessment

For a full study, a reserve specialist walks the property and records the condition of each component: how the roofs are aging, whether the pool deck has cracked, how the paint is holding up on the weather side of the buildings. In a Level I study this is based on the specialist’s own on-site observations; in an update without a site visit it is carried forward from the last report and adjusted from the association’s records. Photographs usually appear in an appendix. The point of the assessment is not to find defects but to judge how much life is left.

Part three: life and valuation estimates

Each component gets three numbers: its useful life (how long that kind of component lasts in that climate and use), its remaining useful life (how many years are left, given its condition), and its current replacement cost. A composition shingle roof might show a useful life of 25 years, a remaining life of 9, and a replacement cost of $148,000. These three figures, repeated down the inventory, are what the financial half is built on.

Some state statutes spell out what the physical half must cover. Washington’s RCW 64.90.550, for example, lists the contents a reserve study must include, down to the reserve component list and the estimated remaining life and replacement cost of each item.

Part four: the fund status

Here the report turns to money. It states the reserve balance on a given date and compares it with the fully funded balance, the amount the fund would hold if every component had been saved for in proportion to the life it has already used up. The ratio between the two is the percent funded, the single figure most often quoted from a reserve study. A fund at 65 percent holds about two thirds of what it ideally would. The report also notes any planned expenditures already committed and any loans against the reserves.

Part five: the funding plan

The last section projects the next twenty or thirty years. It takes each component’s remaining life and cost, inflates the costs at a stated rate, assumes a rate of interest on the balance, and works out the annual contribution needed to pay for every replacement as it falls due without running dry. The plan is built on a funding goal that the report should state plainly: full funding, which aims at 100 percent funded; threshold funding, which aims at a chosen percentage or dollar floor; or baseline funding, which only keeps the balance above zero. The same community can have three very different recommended contributions depending on which goal the board chose.

Most reports present the plan as a year-by-year cash flow table: starting balance, contributions, interest, expenditures, ending balance, for each of the thirty years. The years when several big components fall due at once stand out, and those are the years a special assessment would hit a community that under-funded.

What else to expect

A good report opens with an executive summary that gives the percent funded, the recommended contribution and the funding goal on one page. It should also state its assumptions: the inflation and interest rates used, the component threshold, the date of the site visit and the credentials of the person who signed. If any of those are missing, ask for them before the board adopts the numbers.

Using it

The report is a planning tool, not a bill. The board adopts a contribution in the budget, usually the recommended figure or a stepped path toward it, and revisits the study on the cycle the state sets or every three to five years. The next update starts from this inventory, which is one more reason to make sure it is complete the first time.

Where our information comes from

• Community Associations Institute, Reserve Studies and Funding Resources, including the National Reserve Study Standards (January 2024)
• Revised Code of Washington 64.90.550, Reserve study, contents