Why Complete a Reserve Study for the HOA?

Nuts and Bolts of HOA Reserve Studies

Why Complete a Reserve Study for the HOA?

Why should my HOA complete a Reserve Study?

A reserve study is a budget planning tool. It reviews the major capital systems in the homeowners association.
The study evaluates how much life is left and how much items are likely to cost when they wear out. It calculates how much money the HOA needs to set aside each year to have enough to replace common area items.

Why should I complete a reserve study if Arizona HOA Law doesn’t require us to?

Easy – it protects board members from liability. Somewhere down the line, board members do not want to be subject to potential liability. Especially for non-profits boards, standards are set fairly low. They MUST act in good faith. But it’s not too far of a cry to argue that a board is failing even that standard, if it isn’t making effort to make sure adequate reserves are maintained. Reserve studies would certainly go a long way toward providing the board some protection if they’re competence was ever challenged.

How do you do the calculation?

Take the estimated replacement cost an any item, then divide by number of years it is estimated to last (useful life). That number is the amount that needs to be reserved each year for the HOA.

I am not sure I can adequately complete a study. Are there experts to complete a reserve study for my Arizona HOA Board?

Yes! It can be costly ($500 to $10,000 depending on complexity of the HOA).  Studies get complex, for example when dealing with condos where associations may own only some of the walls.  Determining which walls are homeowner responsibility and which are the responsibility of the association can be tricky.   Gated associations that have their own roads or golf courses, will pay more for a reserve study expert, as large estimates may be required. But, hiring an expert is imperative. They have the knowledge and software to make sure every single component is included, therefore producing the best results.

Reserve studies aren’t perfect either….

For example, if you ask ‘how many years does my roof have left,’ or ‘how many years until we have to replace the swimming pool and what does that cost?’ remember that the answers are only estimates.
Unless your HOA board is expert at building components, they aren’t qualified to evaluate the useful life. The board needs to understand that the reserve study may be an important aspect to their responsibilities, and not doing one may cost some major $$$ down the road!
For more information about how the HOA Reserve Study impacts your HOA Budget, please visit “An Insiders Guide to HOA Budgets” and “Best Practices for Passing an HOA Budget.

Comments 5

  1. Anonymous

    How do you calculate, on a monthly bases, what percentage your fully funded?

  2. There are so many variables to consider when determining how to fund an HOA’s reserve account. Unfortunately, there is not one simple formula for all communities. This is why we recommend a third party conduct a reserve study and that it include a physical inspection and analysis as well as a financial analysis. There are four types of funding: Full funding, Baseline Funding, Threshold Funding and Statutory Funding. Depending on what area of the country your HOA is in the strategy can look very different when determining the useful life of specific amenities. There is some great information out there on this topic but you may want to consult an HOA attorney if you are a self managed community.

  3. “Full Funding” describes the objective to have Reserves on hand equivalent to the value of the deterioration of the each Reserve component. For example, for a $10,000 (current cost) pool resurface project with a Useful Life of 10 years, after two years, when the pool’s surface has deteriorated 2/10ths of $10,000, to be Fully Funded the association should have $2000 set aside for this component (and on and on again for each component). “Full Funding” describes an objective where deterioration is offset by the accumulation of cash.

    “Baseline Funding” describes the objective to have sufficient Reserves on hand to never completely run out of money. This is sometimes described as a “cash-positive” plan. With less cash in Reserves on-deposit, associations with a Baseline Funding objective have higher instances of special assessments and/or deferred maintenance.[11]

    “Threshold Funding” describes an objective chosen by the Board other than the 100% (Full Funding) level or just staying cash-positive (Baseline Funding). This may be a specific Percent Funded target or a cash balance target. Threshold Funding is often a value chosen in-between Full Funding and Baseline Funding.

    “Statutory Funding” describes the pursuit of an objective as described or required by local laws or codes.

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