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 the 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.
Reserve Study reports are not just for Condos and Home Owner Associations! Commercial property management can greatly benefit from these styles of cost analyst reports!