What is a reserve study?
Reserve studies are comprehensive reports that are used as budget planning tools that will assess the current financial health of the reserve fund as well as create a plan for future funding to offset anticipated major future common area expenditures.
According to Community Association Institute's Best Practices, Reserve Studies/Management: “There are two components of a reserve study—a physical analysis and a financial analysis. During the physical analysis, a reserve provider evaluates information regarding the physical status and repair/replacement cost of the association’s major common area components. To do so, the provider conducts a component inventory, a condition assessment, and life and valuation estimates. A financial analysis assesses only the association’s reserve balance or fund status (measured in cash or as percent funded) to determine a recommendation for an appropriate reserve contribution rate (funding plan)."
What are the different types of reserve studies?
Reserve studies fit into one of three categories: Full; Update with Site Visit, and Update with No Site Visit. They are frequently called Level 1, Level 2, and Level 3 respectively (as defined by Washington State RCW 64.90.550).
Level 1: A full reserve study – the reserve provider conducts a component inventory, a condition assessment (based upon on‐site visual observations), and life and valuation estimates to determine both a fund status and a funding plan. They typically extend 30 years. A full reserve study must be in place before a Level 2 or Level 3 can take place.
Level 2: An update with site visit (on‐site review) ‐‐ the reserve study provider conducts a component inventory (verification only, not quantification), a condition assessment (based on on‐site visual observations), and life and valuation estimates to determine both a fund status and a funding plan. A Level 2 update is performed every third year, with the first one scheduled 3 years after Level 1 was completed.
Level 3: An update with no site visit (off‐site review) ‐‐ the reserve study provider conducts life and valuation estimates to determine a fund status and a funding plan. A Level 3 update is performed annually, except in years when a Level 1 or Level 2 has been conducted.
If you follow Washington State RCW 64.90.555 (which we recommend), your reserve study schedule would look like this:
Year 1: Level 1 full 30‐year study
Years 2, 3: Level 3 annual updates
Year 4: Level 2 update with a site visit
Years 5, 6: Level 3 annual updates
Year 7: Level 2 update with a site visit of Level 2 and Level 3 updates continues indefinitely. A Level 1 full study is not necessary after year 1.