COMMON QUESTIONS

What is a Reserve Study?
How does a Reserve Study Benefit the Association?
Why have a professional reserve company complete the study?
Are there industry standards for Reserve Studies?
How often should a Reserve Study be performed?
How much will the reserve study cost?
What components are included in a Reserve Study?
How can component life expectancies be predicted?
How are inflation and interest rates predicted?
How long will it take to have the completed Reserve Study?
What Reserve Funding Method does Crescent Reserve Studies use?

What is a Reserve Study?
The reserve study is a budget planning tool which identifies the current status of the reserve fund and recommends a stable and equitable funding plan to offset the expected future major common area expenditures. The reserve study consists of the following steps:

Component Analysis: This involves a visual inspection of the association reserve components to quantify and determine condition levels.
Financial Analysis: During this step of the reserve study the reserve analyst analyzes the current financial health of the association, pertaining to the reserve balance(s) as well as current reserve contribution rates, interest rates, etc.
Financial Plan: The expected component costs and reserve balance(s) are taken into account and analyzed to determine an adequate reserve contribution rate over the life of the study.

The completed reserve study is a culmination of the above steps to provide a clear and well thought out financial plan to help the association become fully funded. [TOP]

How does a Reserve Study Benefit the Association & Members?
Your association and members will benefit from a professional reserve study as this financial plan will guide the association in a financially responsible direction. Below are the common advantages of having a reserve study performed:

Funds are available to make repairs and replacements when needed, thus helping to avoid special assessments.
The current and future owners equally share in the repair and replacement costs. In other words, the owners are paying for the use of the common elements during their tenure.
The marketability of units or shares is preserved.
Provides an inventory of common area components and a schedule for their repair and replacement

The lack of reserves or inadequate funding have significant disadvantages including the following:

It may adversely affect the ability of unit owners to sell because of concerns that a prospective buyer may have.
It may adversely affect the unit owner's ability to refinance because lending restrictions.
A lack of adequate funding may require the board to levy special assessments to fund for predictable component expenditures. [TOP]

Why have a professional reserve company complete the study?
We recommend a professional reserve study be completed by one of our reserve analyst. We have the experience and independence that is typically lacking with board members or association managers who have personal interest in contribution rates and project expenses. An unbiased report will provide the association with a clear and accurate picture of the current financial health of the association and provide a well defined path in which the association can follow. [TOP]

Are there industry standards for Reserve Studies?
Yes, the Community Associations Institute publishes the National Reserve Study Standards which lists the below minimum content to be included in a Reserve Study:

A summary of the association's number of units, physical description, and reserve fund financial condition.
A projection of reserve fund starting balance, recommended reserve contributions, projected reserve expenses, and projected ending reserve fund balance for a minimum of 20 years.
A tabular listing of the component inventory, component quantity or identifying descriptions, useful life, remaining useful life, and current replacement cost of each element.
A description of the methods and objectives utilized in computation of the fund status and development of the funding plan.
Source(s) utilized to obtain component repair or replacement cost estimates.
A description of the level of service by which the reserve study is prepared.
The fiscal year for which the reserve study is prepared. [TOP]

How often should a Reserve Study be performed?
Washington State regulations state that a Full Level I Reserve study must be performed every three years. A Level I Reserve Study requires an onsite inspection of the components.

Level II Reserve Studies are considered updates to the full study with a site inspection. We recommend this level of reserve study for the years that a full reserve study is not required.

Level III Reserve Studies are updates to the full study with no site inspection. Components are not visually inspected and condition levels are based solely on past condition ratings and are not verified. [TOP]

How much will the reserve study cost?
The cost of a reserve study will depend on numerous factors including but not limited to:

Level of Service Requested (Level I, II, or III)
Size of the Association
The number of components
Age of the Project
Location of the Project

Please feel free to submit a Request for Proposal, (above link) to obtain a quote for a reserve study for your association. [TOP]

What components are included in a Reserve Study?
A common concern among Association Managers and Members is what components are to be included in the Reserve Study. Crescent Reserve Studies has a process for determining which components will be included in the study for repair and replacement. The component should meet the following criteria:

The component is community owned and maintained.
The component is not covered in a maintenance contract.
The component is not included in another part of the budget.
The component has a limited life expectancy.
The component has a reasonably defined life.
The cost is above the minimum association expense threshold.

We have found the above criteria cover the vast majority of components but there can be exceptions, such as components which are not clearly recorded in the governing documents. [TOP]

How can component life expectancies be predicted?
A reserve analyst estimated the condition level of components, remaining economic life and the general useful life of each component. Estimations and averages are utilized based on similar components life expectancies taken from our experience, vendor interviews and national costs handbooks. While this is the best we are able to offer, actual life expectancies may vary, sometimes substantially, due to items such as:

Maintenance History
Quality of Workmanship and Materials
Use Patterns
Unexpected Mechanical Failure

When a component fails prematurely it will affect the projected expenses and contribution rates that are set out in the report. It is suggested that the report be updated annually so that actual expenses and contributions can be updated in the reserve study. [TOP]

How are inflation and interest rates predicted?
Inflation rates and interest rates have a substantial affect on projected costs and reserve balances. This is most noticeable for components which have longer useful life expectancies and have many years of inflation before they are expected to require replacement. A reserve balance for the cost of the replacement today will be severely underfunded for the actual cost 20-30 years down the road.

The best indicators we have for both inflation and interest rates are historical averages. These rates will fluctuate from these averages, as they have in the past, but typically will average out near these assumptions as they have done historically. By updating the Reserve Study annually consideration can be given to substantial deviations from the inflation or interest rates if they appear to be long term scenarios. [TOP]

How long will it take to complete the Reserve Study?
Our study begins with an analysis of the documents which will be requested by the Crescent Reserve Analyst. In order to provide the most accurate assessment possible, we conduct an on-site visual inspection of the components and determine the current condition levels and estimated remaining useful life. After our analysis of the documents, interviews of parties and onsite visual inspection(s) the report will typically be completed within 30 days. [TOP]

What Reserve Funding Method does Crescent Reserve Studies use?
The two most widely used and accepted reserve funding plans are the Component Method and the Cash Flow Method. Both methods are approved by the Community Associations Institute.

The Component Method divides the current replacement cost of each reserve component by the number of years before replacement (remaining life) to arrive at the necessary annual funding amount for each common element. The component method results in annual reserve budgets which vary from year to year. As such, the annual funding amount must be recalculated each year to keep updated and in line with a fully funded goal. Component method reserve funding is a more conservative approach and results in larger balances which can cover unexpected expenses minimizing reliance on special assessments.

The Cash Flow Method pools all of the future replacement costs of the common elements and determines a funding plan that is designed to offset the collective (or pooled) future costs from the reserve fund. On paper this method appears to minimize contribution rates but in reality when there is an unexpected component failure, which is common, the reserve balances can often result in a shortfall and the reliance on special assessments is greater.

Crescent Reserve Studies utilizes the Component Method which we feel is a greater service to our clients. The Component Method is pragmatic, and allows human judgment and experience to enter into the equation. This is a time tested and conservative method for creating a financial plan that leads to fiduciary responsibility. [TOP]