Sometimes I get requests from Association Managers or HOA boards that indicate there is still some misconception concerning what specifically is included in a reserve study.  In helping to clarify what a reserve study is and what it is for, it would be useful to explain what a reserve study should not include.

Any expense that occurs annually, no matter how large should be part of the home owner’s association’s annual budget, NOT  a reserve study.  For example, if a condo community paints one of its buildings every year this expense should be included in the annual budget.  By the way, paint is a nebulous category due to some obscure IRS rules, and how an association files its tax returns, but we’ll discuss that in a future post… I promise.

Small expenses that occur periodically are usually funded through the annual budget, NOT  a reserve study..  What’s a small expense?  It depends on the community.  The threshold between the annual budget and reserve budget for a townhouse community maybe 300, it could be 3,000.  Typically, I try to include smaller items on the report, but will leave them unfunded.  If the home owner’s association feels differently after reviewing the reserve study, I can always include funding for these items.  A good example is light fixtures or interior doors.  I just performed a study for an 11 story condo tower at Wrightsville Beach.  They have a full time maintenance man on staff.  When required, he paints all the hallways and this is paid through the HOA’s annual budget.

A Reserve Study does NOT include Acts of God.  A reserve study accounts for predictable future costs.  I don’t own a crystal ball.   A bartender serves somebody one drink too many, and next thing you know you have a car where your monument used to be.  You won’t see that in a reserve study.  That’s where the HOA’s insurance comes in.

Most people have no clue what a reserve study is.  In fact at family gatherings, I still have to explain to at least a couple of cousins and an uncle.  Some HOA board members have heard of a study, and while most association managers know what they are, confusion is quite common concerning what is included in a study and how a study should be used. I will start by giving a very basic explanation of what a reserve study is.  Hopefully future posts, will flesh out the concept of a reserve study in a logical fashion.

A reserve study is essentially a budget planning tool.  A reserve study is concerned with an association’s assets that are expensive to replace and have a useful life of more than 1 year.  A study will inventory a community’s assets and then provide a funding strategy to cover costs associated with the repair or replacement of these assets.  Retaining walls, streets, tennis courts, pools, roofs, and siding are the most obvious reserve items, but there are many more.  Our software has a database of literally hundreds of various assets.  It might be helpful to explain what a reserve study is NOT, but I will get to that in another post.

Reserve studies rarely include landscaping or trees, however there are times when they clearly should.  Now I am not an arborist, but I have become very familiar with the Bradford Pear.  Bradford Pears were popular a couple decades ago, but now many communities wished they were never planted.  They are pretty.  The problem is that they do not develop a central trunk.  Their numerous branches meet together at the trunk and create weak points.  After 20 years a Bradford Pear will start dropping its branches.  Avoid the liability before one falls on a car, or worse a person.  If your community has Bradford Pears, make sure that your reserve study includes the removal, stump grinding, and replacement with a more suitable tree.

If your HOA plans on conducting a large landscaping rejuvenation project or removing more than just a few trees, your board should have an option of paying this through your reserves.  Hopefully, you already have a quote, and it’s that easy getting it included in your associaton’s reserve study.