A reserve study is an in-depth evaluation of a property's physical components and an analysis of its reserve funds. Based on a thorough on-site inspection, a custom reserve study details anticipated replacements or repairs to common-area elements and recommends annual reserve funding to cover capital expenditures for the next 30 years. The reserve studies give community association managers, board members and property owners assurance that future major property expenses are identified early and that a funding plan is in place to pay for those expenses.
A well-prepared reserve study can avert special assessments and supports a harmonious community.
Baseline Funding means establishing a Funding Objective of keeping the Reserve cash balance above zero. Unfortunately, due to having little or no “margin for error” this Funding Objective exposes associations to a high risk of special assessments (because things rarely happen exactly according to plan). Full Funding is a conservative alternative, where the objective in any year is to have a Reserve balance equal to the value of deterioration at the association. When the Reserve balance is equal to the calculated deterioration at the association, the association is described as “Fully Funded”, or 100% Funded. Baseline and Full Funding are the two most common Funding Objectives. Threshold Funding, a third option, means keeping the Reserve Fund at or above a pre-determined dollar or Percent Funded amount (typically a “middle ground” objective).
Because Reserve income and expenses never occur exactly as planned, decide in advance your risk strategy (how distasteful you find special assessments). Your tolerance for special assessments should dictate which Reserve Funding Objective you chose. Most associations select Full Funding or Baseline Funding objectives.