A reserve study is a budget planning tool which identifies the current status of the reserve fund and creates a stable and equitable funding plan to offset ongoing deterioration, resulting in sufficient funds when those anticipated major common area expenditures actually occur. The reserve study consists of two parts: the physical analysis and the financial analysis. This document is prepared by an outside independent consultant for the benefit of administrators (Board of Directors or Strata Council Members) of a property with multiple owners, such as a condominium association or homeowners’ association (HOA), revealing an assessment of the state of the commonly owned property components – as determined by the particular association’s CC&Rs and bylaws. Reserve studies however are not limited only to condominiums and can be created for other properties such as resort (shared vacation ownership) properties, apartment buildings, worship facilities, private schools, private (golf/social) clubs, and office parks. Reserve studies are in essence planning tools designed to help the board anticipate, and prepare for, the property’s major repair and replacement projects. For example, such projects would include: replacement of the roof on the building(s), replacement of the boiler, retrofit of the fire alarm devices, and resurfacing of the roadways. All in an effort to preserve the value of the association’s assets. In some jurisdictions across Canada, a reserve study is also sometimes referred to as a “reserve fund study”, “contingency reserve fund study”, or “replacement reserve study” and, in British Columbia, the legislation refers to this type of study as a “Depreciation Report”.
The purpose of a reserve study is to give those overseeing the maintenance of the property a better idea of what major expenses to expect and an educated estimate of when these expenses will occur. With this knowledge, the homeowners’ association board or manager can create a budget so association members will make their fair share of reserve contributions, designed to offset the slow but steady ongoing reserve component deterioration of the association assets, and avoid being surprised by components that deteriorated often in plain sight and over a number of years. In addition, the reserve study provides important annual disclosures to association members (and prospective buyers) about the condition of common area components, and the level of preparedness (strength) of the reserve fund (typically measured in terms of Percent Funded). A reserve study is a roadmap that allows decisions to be made which will be efficient and effective for the long term.