A capital reserve study can well be considered the prime component in the financial management of a community association. Random strategies for reserve funding in lieu of such a plan can be a recipe for deferred maintenance.
A reserve study documents the commonly owned components of a condominium or homeowner association, surveys their present condition, and determines when each component needs to be replaced and the cost to do so. It then lays out a plan on a timeline telling you how to accumulate the funds needed to do those replacements. Using the recommended annual contributions to reserve, you can compute the reserve portion of your budget.
Sounds straight forward enough. But the engineering characteristics of building and site components have a decided tendency to demand a schedule of their own. For example, the typical service lives of roof shingles and bituminous concrete pavements (17 – 20 years) means that they come up for replacement at about the same time. That can create short bursts of high demand for funds followed by longer periods of lower expenses when funds can be accumulated. And of course there are other components like decks that need to be factored in.
The challenge is to be able to set a reserve funding level that responds to those peaks and valleys. Your reserve funding level that is capitalizing those big projects up ahead should not be set so high that it accumulates too much of the money of the membership when it is not needed. Using a fluctuating contribution level that attempts match the varying expenditures can be difficult when trying to satisfy the perspectives of both the board and the membership. And, of course, there needs to be a minimum balance in the reserve account in order to meet unexpected obligations, which, of course, should always be expected. Clearly, there is a need to balance these all variables in the equation. That is where a professional can help.