Reserve Studies: Basics & Levels of Service By Mallory Paproth

Reserve Studies: Basics & Levels of Service

By Mallory Paproth

A reserve Study is a dynamic report that reflects the longterm health of a community and tells the financial story of where a community is going. It is important to understand what a reserve study is, the roles boards and management play, and key takeaways from your community’s reserve study. For the purposes of this article, common interest development (CID), homeowners’ association (HOA), community, and association are used interchangeably.

Let’s start off with the law. In the California Civil Code, the Davis-Stirling Act was specifically designed to govern common interest developments in California. An HOA must have a reserve study performed once every three years to conduct a reasonably competent and diligent visual inspection of the accessible areas of the major components (Cal. Civil Code § 5550).

There are two parts to every reserve study: a physical analysis and a financial analysis. The physical analysis includes component inventory, condition assessment, and life and valuation estimates. These are the major assets of the common area that the community is required to repair, replace, restore, and maintain over 30 years. The financial analysis combines anticipated component expenses with the reserve balance and anticipated future allocations for the fund status and creation of the funding plan.

While certification or licensing is not required for reserve professionals, CAI offers a designation for reserve analysts that meet and uphold specific criteria, known as Reserve Specialists. The Reserve Specialist designation picks up where the Davis-Stirling Act fell short on reserve study details. This is where the reserve study ‘levels’ first appear and is standard industry terminology.Now that you are refreshed on what a reserve study should contain, which level of service do you need?

"The physical analysis includes component inventory, condition assessment, and life and valuation estimates."

There are three levels of service, Level 1, Level 2, and Level 3. Levels 1 and 2 are on-site reserve studies, which means they both satisfy the Civil Code’s requirement for an on-site inspection. The only difference is a Level 1 includes full quantification of the major components of the association. A Level 1 generally only needs to be done once, to establish the component inventory. A Level 2 verifies and analyzes components, but does not count and measure the common area. A Level 3 Reserve Study is also called a financial update. Although not required by law, they are prudent to receive fresh reserve disclosures, keep track of reserve expenses, and show the current status of the reserves.

For on-site reserve studies (Level 1 and Level 2), I encourage board member and/or community manager participation during the site inspection. This is an opportunity to ask any questions the board may have regarding reserve studies in general, any specific reserve components, or a scenario or project the board is considering. During the site inspection, the site inspector will observe all accessible reserve components and discuss the components with participants for any recent or upcoming maintenance plans.

Level 1 reserve studies take more care and time than a Level 2. When determining what common area should be included in a Level 1, we turn to maintenance matrixes and other supporting documents, as governing documents are often confusing. It can be tricky figuring out where homeowner responsibility and HOA responsibility divides, especially for exclusive-use common areas such as balconies and decks.

Use the reserve study process as a time to think both shortterm and long-term. We provide a 10-year expenditure table to assist boards in planning and scheduling projects. We encourage boards to discuss the upcoming five years and consider the following questions: What needs to be done: painting, street seal, trip hazards, pool equipment? What else would the board like to do: directories/monuments, refurbish dog park, new pool furniture, landscaping? Keep in mind that timing is important when coordinating projects. You wouldn’t want to start a paint project right after fresh landscaping has been planted.

HERE ARE SOME KEY TAKEAWAYS:

• Every reserve study should include the common area the HOA is responsible to maintain (physical analysis), and a funding plan (financial analysis).

• Your reserve study should reflect recent past, present, and known upcoming expenses.

• If it has been a busy year with many reserve projects, it’s a good idea to get started on the reserve process earlier than usual.

• Participate in the on-site inspection; your community will benefit.

Mallory Paproth has been working for SCT Reserve Consultants for over 4 years. She is a CSU Long Beach alumna with a Bachelor’s degree in Financial Management. Mallory has attained her Educated Business Partner designation for CAI and is on the CAI-CV Education Committee. She can be reached at (951) 296-3520 or by email at mallory.p@sctreserve.com.