Understanding Your Reserve Study By: Douglas D. Taylor, RS, PRA, President, Nevada Reserve Studies, Inc. Information current as of 7/30/2019.
"Reserve Study" means a study which projects the expenses of an Association for the repair, replacement and restoration of the major components of the common elements and which establishes the reserves required to cover such expenses. (Ref: NAC116.450) Required pursuant to (Ref NRS116.31152).
A reserve study is an examination of two facets of the association.
The first examination is of the associations common element improvements, referred to as components, for the purpose of determining how much money the association will need to replace common element components at the time they will need to be replaced.
The second examination is of the association’s financial condition such as bank accounts, financial reports and investments instruments.
The Reserve Study boils down to an estimated calculation, taking into consideration the amount of money the Association has in the bank that is dedicated to the Reserve Fund and how much will be spent each year over a 30 year period. Once we know that, we can estimate how much money must be deposited into the Reserve Fund Account(s) each year. The State of Nevada requires that the Reserve Fund be "adequately" and "sufficiently" funded.
The Association must create a budget each year in order to know how much money it will take to run the Association. This is referred to as the Annual Budget. The Annual Budget consists of two parts:
- Operating Expenses – Short term expenses; utilities, gardeners, pool service, etc.
- Projected Reserve Expenses – Long term expenses: roof replacement, street maintenance, building maintenance and painting and pool resurfacing.
The Operating Expenses are determined from previous bills for utilities, service contracts with the gardener or pool service company, insurance, etc. The Operating Expenses are usually recurring from month to month or year to year. The Operating Budget is a combination of the Operating Expenses and the Projected Reserve Expenses. Another term used for the Reserve Assessment is Reserve Contribution. The Annual Budget is prepared and ratified by the homeowners each year. The homeowners may pay a monthly assessment to their association which would equal the Total Annual Budget Amount, divided by twelve months, divided by the number of homes or units in the association. Included in this assessment is the Reserve Contribution Funding.
"Major Common Element" means the common elements of an common-interest community. (Ref: NRS116.0605). Major component of the common elements means any component of the common elements including, without limitation, any amenity, improvement, furnishing, fixture, finish, system or equipment that may, within 30 years after its original installation, require repair, replacement or restoration in excess of routine annual maintenance which is included in the annual operating budget of the association. (Added to NRS by 2005, 2581)
A Reserve Component Inventory is a list of common element components which are identified in a reserve study that may require repair, restoration or replacement within more than once per year but not more than 30 years since its last repair, restoration or replacement.
There are Four(4) Basic Forms of Reserve Studies. Each provides a different level of service and are used depending on the Association’s need for funding information.
Full: This is includes an on site inspection with a photo inventory of the reserve components to include a physical and financial assessment of all common element components.
On-Site: This is an On Site Inspection with update of physical and financial assessment of common element components. A review of the common element components use life and remaining use life and replacement cost is adjusted as may be required.
Off-Site: This is a review and update of the associations current financial conditions, deprecation and replacement cost adjustments and revised reserve contribution requirements.
Pre-Construcion: This is for new developments to estimate the initial reserve contribution. The projected reserv components are based on information provided by the developer such as construction site plans, landscape plans and a list of common element amenities anticipated by the developer. Because this type of study is prepared prior to any unit or lot sales, the study uses Component Method calculations to estimate reserve contributions and annual year ending bank balances.
Reserve Study formats and content varies from company to company. However most "Full" Reserve Studies should include the following:
- Description of the Association (location, structure type, when built, amenities).
- Inventory List of the Association’s Major Components.
- Estimates of Use-Life and Remaining Use-Life of each Reserve Component.
- Estimated Replacement Cost of each Component.
- Estimated Annual Funding Rate.
- Estimated Year Ending Fund Balance.
- Estimated Year End Percentage of Full Funding.
- 30 Year Reserve Account Cash Flow Spread Sheet.
- A summary of an inspection and description of each Reserve Component.
- An estimate of the annual reserve assessment needed (taking into consideration current reserve funding balances).
- Reserve Funding Method Used in determining the annual reserve assessment needed.
- Reserve Study Required Disclosures (NRS116.)
The State of Nevada Requires that the executive board of an association shall have a study prepared at least every 5 years and a review of the study at least annually. This will serve to determine if the reserve levels are sufficient and to allow for adjustment of the reserve levels if needed. A review would be necessary if the Board determines that actual component depreciation, reserve account balance or unscheduled expenditures were incurred which varies from the study.
- Have any Reserve Components been repaired or replaced off schedule since the last Study or Review?
- Have any Reserve Components sustained any extreme wear and tear which could reduce it's remaining use life estimates since the last Study or Review?
- Has inflation changed the cost of labor and/or materials of any Reserve Components?
- Has the Board decided to defer or accelerate the repair or replacement of any Reserve Component since the last Study or Review?
- Is there a substantial variance between the associations actual Reserve balances and the Reserve Studies estimates for the current year?
- Is the association's current Reserve Study in compliance with Nevada State Law?
- Has the association received a construction defect settlement since the last Study was prepared?
- Has the association added or removed any Reserve Components since the last Study?
- Has the builder completed their transition out of the association since the last Study?
If you answer YES to any of the above questions, you may want to consider having your Reserve Study Reviewed or Replaced.
A properly prepared Reserve Study will provide the following:
- Defines and details long term reserve expenses.
- Provides a Funding Plan to meet long term reserve expenses.
- Helps insures stability in year-to-year budgeted assessment rates.
- Satisfies Nevada State Requirements.
- Allows for periodic inspection of Common Elements to insure proper up-keep and maintenance.
- Provides a maintenance schedule guide for repair and or replacement of major common element components.
- Reserve Study Preparer offers an un-biased (3rd party) evaluation and projected funding plan of reserve required.
It wasn't too long ago that many Associations raised money to paint the buildings or re-roof their homes by charging each owner a Special Assessment. This Special Assessment, was limited in it's use by the Association’s governing documents to be assessed and used within that one year. In addition, it had to be voted on by the owners and in order to pass, required (depending on the limits set by their CC&R's) 50%, 66%, 75% and sometimes even 90% of the owners to agree to the Special Assessment. Because the costs for large maintenance jobs was expensive, the Assessments could be thousands of dollars. This could lead to a financial hardship on many owners, particularly those on fixed incomes. With a Reserve Contribution, the benefit of paying into the Reserve Fund a little each month is so much easier and financially more feasible than an Annual Special Assessment. Also, the best part is that when the streets need replacement or the buildings need painting, the money is available to do the work. It also benefits because the Association areas can be kept up in good shape, all the time. This helps property value and visitor saying, "Oh, what a nice place this is to live".
The State of Nevada requires that a person to conduct a reserve study must be qualified by training and experience. NAC 116.420 goes into detail regarding these qualifications. The State also requires that a person preparing reserve studies shall be registered with the Nevada Real Estate Division (NRS116.31152(2) and (NRS116A.420.1).
The reserve study is a subjective evaluation report of the association’s financial and physical condition. The results of the Study is a product of facts and assumptions determined by the Preparer. The Board may request the Preparer to explain the Study to the Board and answer their questions. If the Board is not satisfied with the results of the Study, they may seek the services of another Preparer to review their Study and have that Preparer adjust as he/she may deem necessary.