In many states, community associations are legally mandated to conduct reserve studies. This is not without reason: Things happen—water mains break, properties are damaged, repairs are required—and a good reserve study will help your association to prepare for any and all contingencies. Without a reserve study, meanwhile, your association could be caught completely off guard by some chance happening—and it could ultimately prove ruinous.

That is why reserve studies are important—but what is a reserve study? For those who are new to HOA service, it is not an easy concept to fathom. A reserve study is essentially used to assess the current state of your HOA reserve fund, and to plot a course of action for better funding, particularly for common area expenses and routine upkeep that is on the horizon.

A typical reserve study can be divided into two basic parts—the physical analysis and the financial analysis. Both sections of the study will include information on the different components of your HOA. A component is any part of the association that your HOA is responsible for maintaining, repairing, or improving; a component might be a clubhouse, a public sidewalk, or a parking lot, then. Each component will have its own line entry within the study, denoting the basic value/cost of that component.

The reserve study will begin with the physical analysis. This part of the study will include an inventory of all association components; an assessment of the condition of each component; an estimate of how much longer said component will last, and how much it will cost to repair or replace it.

After the physical analysis, your HOA reserve study will have a financial analysis. This begins with a statement of the reserve balance—i.e., how much money your HOA has, at any given moment, to deal with emergency maintenance issues. The financial analysis will also indicate how much money would be needed to maintain or replace all components; this is called the fully funded balance. Finally, the financial study will show the percentage or ratio of the actual reserve balance to the fully funded balance. This could be a deficit or a surplus.

There is a lot more complexity than all of that, of course—but these basic guidelines should help you get the lay of the land when you look at your association’s next reserve study.

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