Although any property can have a reserve study performed, they are commonly performed for condominiums, townhomes, timeshares, churches, and commercial buildings. These properties tend to have either owners or tenants that pool their resources together to pay for common area elements they all share on the property. Common area components include items such as roofs, siding, pools, and asphalt. These items are the responsibility of the association to maintain on behalf of the owners.

These common area elements, sometimes referred to as assets or components, deteriorate over time. Maintenance and replacement expenses are required because assets decay over time. A reserve study methodically estimates the amount and timing of these costs so financial resources can be set aside to pay for the expenses as they arise.

Two Parts: Physical and Financial Analysis

A reserve study consists of two parts: physical and financial analyses. During the physical analysis, major common area components are inventoried by the reserve analyst. The reserve analyst also performs a condition assessment, where the assets wear and tear is noted to estimate the remaining useful life of each component. Lastly, the current costs to replace each component of the components are estimated.

The physical analysis underpins the financial analysis. The reserve analyst translates the physical analysis into a detailed financial representation of the estimated expenses over 30 years. A solid reserve study also accounts for inflation when estimating future replacement costs and investment income on excess reserve funds.

Updates After Initial Study

A reserve study is a snapshot in time; a study becomes outdated, requiring periodic updates. Even without reserve expenditures, the rate of inflation and the yield on invested funds changes from year to year. Small changes in either factor may cause significant changes to the long-term projections in the reserve study due to the effects of compounding.