A reserve study of any community association, whether it is a condominium association, homeowners association, cooperative, or timeshare, consists of both a physical analysis and financial analysis. The physical analysis is the framework on which the financial analysis of the reserve study funding plan is built. This article is designed to give the reader an in depth understanding the physical analysis of the reserve study.
There are two goals of a reserve study’s physical analysis: (1) to estimate useful and remaining life of major components; and (2) to estimate current replacement cost of major components. To accomplish these goals, the reserve analyst will perform the following steps as part of the physical analysis:
- Component List Development
- Specifying Quantity of Each Component
- Current Cost Estimates
- Useful Life Estimates
- Remaining Life Estimates
- Field Report Preparation
These five steps of the physical analysis is the bedrock for building for a long-term reserve funding plan for associations.
Component List Development
The first task when conducting the physical analysis of the reserve study is to take an inventory of the common elements components; in other words; the first task of the reserve study is to develop a component list. The items that go into the component list are not assembled haphazardly but are based on a systemic method. According to the National Reserve Study Standards, reserve component list decisions rely on a four-part test in which each component needs to pass all four of the four tests to be included in the reserve study:
- Test #1: The component must be a common area maintenance responsibility.
- Test #2: The component must have a limited Useful Life (UL).
- Test #3: The component must have a predictable Remaining Useful Life (RUL).
- Test #4: The scope of work must be above a minimum threshold cost.
The reasons for these tests are relatively straightforward – the reserve study should only include components that the association is responsible for maintaining and that led themselves to a predictable and reliable estimate of the reserves that will be needed to be set aside by the Association. Also, the reserve study should not be cluttered with small expenditures that are better suited to be paid from the operating budget.
An inaccurate or incomplete list of components can materially distort the association’s long-term funding plan.
Practical Consideration
As a board member, you may want to review your reserves to ensure that your association has properly excluded (or included) reserve components. The following are examples of an item that should be excluded from a reserve study and another example of items that should be included in a reserve study. Many times condominium associations are responsible for maintaining all items outside of the four walls of owners’ units. However, we are aware of at least one condominium association that HVAC units are located outside of the owners’ unit but that nevertheless the responsibilities of the owners to maintain and replace. Therefore, this is an example of an item that should properly be excluded from the reserve study.
Other items that board members may think should be excluded from the reserve study are streetlights and roads in townhome and homeowners associations. Many board members assume that a local city or other governmental entity is responsible for maintaining these components, but there are instances when the roads are designated as private and the association bears the responsibility for their maintenance. As noted by the LA Times, some cities will not approve new subdivisions unless there is a community association that will be responsible for the maintenance of the roads and streetlights. Consequently, you should review your reserve study and your association’s governing documents closely to determine whether your association is responsible for these types of items so you can properly establish reserves for them, if necessary.
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Specifying Quantity of Each Component
The physical analysis will include specifying the quantity of each component that will be included in the reserve study. Existing site maps and construction drawings of the development may serve as a guide to component quantities. “As built” drawings are an even more reliable source of information for these quantities than site maps and construction drawings as the latter are filed when the development was begun and represents the builders plans rather than the development as actually built. Still, a detailed site and building analysis is often necessary to obtain an accurate count and quantities of these items so the square or linear footage must be measured or other items must be counted.
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Current Cost Estimates
There are several resources that are used to get current cost estimates for replacing the association’s common element components. Replacement costs can be obtained from manufacturers, local contractors, cost estimating manuals (e.g., R.S. Means Cost Works, Marshal & Swift, Lee Saylor, Inc., F.W. Dodge). Many reserve professionals also have proprietary databases of actual construction costs to assist in providing reliable cost estimates.