Understanding the terminology used in reserve studies is crucial for community association members, board members, and property managers. A reserve study is an essential tool for effective financial planning and property management.
However, at ReserveWise, we understand the complexities that come with the terms you need to know to get your reserve study right. To help you and your board navigate the process, we’ve compiled a list of key terms and concepts that you need to know.
Reserve Study
A reserve study is a budget planning tool used by community associations to identify all the components they are financially responsible for, assess the status of the reserve fund, and develop a funding plan to cover anticipated expenditures.
This study includes a physical condition assessment of the components and a prioritized list of capital repair and replacement projects. Essentially, a reserve study comprehensively examines a property’s physical components and financial needs, offering a 30-year capital plan to meet those needs.
Condition Assessment
During a reserve study, a reserve specialist conducts condition assessments for all reserve components. This involves a visual, non-invasive evaluation to document the current condition of each component. Condition assessments are critical for understanding the immediate and future needs of the property.
Component/Asset
Components or assets are the physical or functional elements of the community that the association is financially responsible for, and they have a finite useful life. These elements, such as elevators, pavement, siding, HVAC systems, and amenities, deteriorate over time and require maintenance or replacement. Individual unit owners do not own these components; the association’s reserve budget covers their repair or replacement.
Long-Lived Component/Asset
Long-lived components are those whose useful life extends beyond the 30-year scope of the reserve study. These components are not expected to need repairs or replacement within the 30 years following the study, and therefore, are not included in the immediate capital planning.
Life Cycle Costs
Life cycle cost is the total cost of owning a component over time. This includes the initial purchase cost, operating and maintenance costs, energy costs, repair or replacement costs, and the cost of disposal or removal at the end of its life cycle. Understanding the life cycle cost is essential for conveying the true cost of ownership for a component.
Replacement Costs
Replacement costs estimate the expense involved in a capital replacement project, planning for the replacement of a component with a new, equivalent item. Accurate replacement cost estimates are crucial for efficient capital planning and insurance purposes, ensuring that the association can fully recover from covered losses.
Useful Life & Remaining Useful Life
Useful life is an estimate made at the beginning of a component’s life, determining how long it will be operational. This estimate uses various depreciation methods to spread the cost of the item over its expected lifespan. The remaining useful life is assessed at any point during the component’s operational life to estimate how much longer it will remain functional based on its current condition, maintenance history, and usage patterns.
Reserve Fund
Unit owners in a community association pay monthly dues into the association’s reserve fund, which is used to maintain and replace community components. Properly administered dues ensure that each owner pays their fair share for component projects, regardless of when they are completed.
Adequate Reserves
The Community Associations Institute (CAI) defines adequate reserves as a reserve fund and stable multi-year funding plan that together provide for the timely execution of major repair or replacement projects without relying on supplemental funding such as special assessments or loans.
Come to Terms With Reserve Studies With ReserveWise at Your Side
Understanding these terms is just the first step in effectively managing your community’s assets and financial planning. At ReserveWise, we specialize in providing comprehensive reserve study services tailored to your community’s needs.
Our team of qualified reserve specialists is dedicated to helping you maintain financial stability and ensure the longevity of your property’s components. Contact us today to learn more about how we can assist you with your reserve study needs.
