An In-depth Look at Reserve Funds

Reserve Study Terminology

Richard Thompson, President
Association of Professional Reserve Analysts

  • COMPONENT: The elements which form the foundation for the reserve study. Reserve components consist of those that are maintained and repaired by the association.
  • COMPONENT INVENTORY: The task of identifying and measuring reserve components by visual observation, review of association files and blueprints, and input from knowledgeable experts.
  • CONDITION ASSESSMENT: The task of evaluating the current condition of the component based on observed or reported characteristics.
  • DEFICIT: An actual (or projected) reserve balance less than the fully funded balance. The opposite would be a surplus.
  • FINANCIAL ANALYSIS: The portion of a reserve study where current status of the reserves (measured as cash or percent funded) and a recommended reserve contribution rate (Reserve Funding Plan) are derived, and the projected reserve income and expense over time is presented.
  • FULLY FUNDED: When the actual or projected reserve balance is 100 percent funded.
  • FULLY FUNDED BALANCE: An indicator against which the actual or projected reserve balance can be compared. This number is calculated for each component, then totaled.
  • FUNDING GOALS: There are several approaches to reserve funding:
  • BASELINE FUNDING: Establishing a reserve funding goal of keeping the reserve cash balance above zero.
  • FULLY FUNDING: Setting a reserve funding goal of attaining and maintaining reserves at or near 100 percent funded.
  • STATUTORY FUNDING: Establishing a reserve funding goal of setting aside the specific minimum amount of reserves required by local statues.
  • THRESHOLD FUNDING: Establishing a reserve funding goal of keeping the reserve balance above a specified dollar or percent funded amount. Depending on the threshold, this may be more or less conservative than “fully funding”.
  • FUNDING PLAN: The savings plan followed to funds adequate to pay for anticipated reserve expenditures.
  • FUNDING PRINCIPLES: In the development of a funding plan, the following principles are to be considered:

* Sufficient funds when required
* Evenly distributed contributions over the years
* Fiscally responsible

  • PERCENT FUNDED: The ratio at a particular point of time of the actual reserve balance to the fully funded balance expressed as a percentage.
  • PHYSICAL ANALYSIS: The portion of the reserve study where the component inventory, condition assessment, and life and valuation estimate tasks are performed.
  • REMAINING USEFUL LIFE: The estimated number of years that a reserve component will serve its intended function.
  • REPLACEMENT COST: The cost of replacing, repairing, or restoring a Reserve Component to its original functional condition. The current replacement cost would be the cost to replace, repair, or restore the component during that particular year.
  • RESERVE BALANCE: Actual or projected funds as of a particular point in time that the association has identified for use to defray the future repair or replacement of those major components which the association is obligated to maintain. Also known as reserves, reserve accounts, cash reserves.
  • RESERVE STUDY ANALYST: A professional that prepares reserve studies.
  • RESERVE STUDY: A reserve study identifies the major components for which the association has maintenance responsibility that have a useful life of 3 to 30 years. Each component is assessed for condition, useful life, and cost of replacement. With this information, a 30-year maintenance schedule and funding plan is produced. This 30-year plan provides current and future boards with a roadmap to responsibly maintain the community’s assets. Following the plan ensures that all members pay their fair share of these major expenses. Special assessments become a thing of the past!
  • SPECIAL ASSESSMENT: An assessment levied on the members of an association in addition to regular assessments. Special assessments are often regulated by governing documents or local statutes.
  • SURPLUS: An actual or projected reserve balance greater than the fully funded balance. See deficit.
  • USEFUL LIFE: The estimated time in years that a reserve component can be expected to serve its intended function when new if properly installed and maintained.


The Reserve Study Process—A Snapshot

One of the most valuable planning processes a homeowner association can use is the reserve study, yet many condominium and HOA boards overlook this important tool. A reserve study charts a long-range course for the board to follow to best manage the assets in its care. Since the community’s assets drive the value of the members’ homes, this is no small matter. If the board fails to adequately plan for maintenance of the community’s assets, members will suffer both financially and aesthetically.

A reserve study analyzes repair and replacement needs like roofing, concrete repair, and painting that happen periodically and provides a funding plan for accumulating money to perform this work when it is needed. It is more a budgeting function than a construction or building analysis, although there is an element of that. The study is usually based on visual observations, as opposed to forensic testing (tearing walls and roofs apart to see what’s underneath). The reserve study assumes that regular and adequate maintenance is being done to prevent premature repairs or replacements.

There are several parts to the reserve study process:

1. All building and grounds components that are maintained by the community and have useful lives of 3 to 30 years, the recommended projection period for a reserve study, are identified,

2. The condition of each component is carefully evaluated and an estimated remaining useful life applied to each plus the useful life when the asset is new.

3. The repair or replacement cost of each component is estimated based on current bids or reliable construction cost estimating sources (available from RS Means, Craftsman Book Company, and other similar sources). The information for each component is applied to the formula: Cost ÷ Remaining Useful Life = Money Needed Yearly for Reserve Fund. Totaling the results for each component will produce how much money should be reserved yearly. For example, if roof replacement costs $100,000 and the remaining useful life is 25 years, then $4,000 is required yearly to pay for the work when it’s needed. Doing this procedure for each component will show the total money needed yearly to fund reserves. Each year, the reserve fund needs to be adjusted by area inflation and the interest earned on the invested reserve funds.

4. Since the recommended projection is 30 years, the inflation rate and yield on invested funds at the time of the study need to be factored in to ensure the fund keeps pace with reality. Adding inflation will increase future year costs and interest yield on invested funds will reduce the amount of owner contributions.


A reserve study with no funds is a car with no gas: It will go nowhere! The reserve study should provide a recommended funding plan, which calls for regular and adequate contributions to pay for future repairs without the need of special assessments. For condominium communities, this is accomplished monthly. For HOAs with few assets, reserve contributions can be quarterly or annual, whatever the regular assessment (fees, dues) schedule is. If each member contributes a portion monthly, all members that own there along the 30-year timeline will only contribute an amount attributable to their time of ownership. And all members will pay. This is the fair approach to reserve funding.

How much does a Reserve Study Cost?

If the HOA has a qualified volunteer experienced in construction cost estimating, the cost is nothing. However, there are clear advantages to having a knowledgeable reserve study professional perform the work. Aside from the expertise, knowledge of local contractors, and current costs, there is no conflict of interest that HOA members have. Costs to perform a reserve study vary based on the size of the HOA, the number of components, and the time needed for field work and report compilation. The initial reserve study costs the most since it involves time to gather the component data. Reserve study costs range from $1500 to $4000 for HOAs up to 100 units (although extraordinary circumstances, number of components, or high cost locations can drive cost higher). Large communities with many reserve assets can expect to pay tens of thousands of dollars. If there are particular problems like dry rot, structural, soil, or drainage, an engineering study should be incorporated with the reserve study. Recommended annual updates are much less costly since they involve only tweaking the initial study.

Reserves – The Experts Speak

by FLCAJ Editorial Staff

Reserves are part of your investment in your community. When you buy a home in a condominium or HOA, there is an expectation that the common property is adequately maintained and in usable condition. One expects that the walls, roofing, pavement, and wooden structures are sound and that there will be no large special assessment in the initial phase of ownership. Conversely, when a home is sold, part of the sale price is the appropriate share of the reserve pool that will be used for future repairs.

Reserves are a very important consideration in community association living in Florida because the sun and salt work together to require a significant amount of maintenance and repairs. When you consider large communities comprised of hundreds of units housed in many buildings, the necessary support funds can be staggering.

There are legal considerations as well. The State of Florida requires annual budgets and that “the budget shall include reserve accounts for capital expenditures and deferred maintenance. These accounts shall include, but are not limited to, roof replacement, building painting, and pavement resurfacing, regardless of the amount of deferred maintenance expense or replacement cost, and for any other item for which the deferred maintenance expense or replacement cost exceeds $10,000,” FL Statute §718.112(2)(f). (See sidebar)

In an effort to provide answers for commonly asked questions, FLCAJ recently spoke with three reserve specialists in Florida and invited them to share their insights on this important topic. Those who accepted the offer were John R. Frazer, RS, J.R. Frazer Reserves & Appraisal Services; Stephen F. Brubaker, RS, CCI, CAI, Brubaker Robins North America; and Bob Hassol, PCAM, Florida Regional Director, Reserve Advisor’s, Inc.

1) Funding Reserves: What information needs to be considered in developing a funding plan?

Frazer: The first step in developing a reserve study funding plan is to create a needs analysis. It is important to determine a complete and accurate inventory of all association property that requires reserve funding. The inventory list should include all components needed to comply with state statutes. It is necessary to quantify the number of units for each component and their estimated replacement cost. It is also essential to conduct a physical inspection to detail the useful life and remaining useful life for each component. These steps are the first part in creating a funding plan and are essential to develop the needs analysis portion of a reserve study.

Part two in developing a funding plan is the financial analysis. This includes examination of the association’s existing reserve fund balances and a comparison of the existing fund levels to the financial fund levels established in the needs analysis portion of a reserve study. During the financial analysis it is important to create a funding plan that will cover all anticipated reserve fund expenditures over a 20 to 30 year funding plan. The analysis must include funding any deficits and establishing the new annual reserve budget dollar amount needed to meet future reserve expenditures.

Brubaker: A reserve analysis is designed to provide a recommended funding plan, including regular and adequate contribution levels to fund future expenses. First and foremost, the legal requirements regarding reserve analysis and funding for the particular property type must be established. These requirements may be statutory, detailed within the property’s specific documents, or both. Next, an accurate reserve analysis and reserve funding plan must consider the actual reserve funds in hand at the beginning of the fiscal year under consideration. Actual historical installation/replacement dates are also necessary before a proper reserve analysis can be completed. This background information must be provided to the reserve analyst by the association. It is then the reserve analyst’s responsibility to determine the factual physical counts (squares of roof, square yards of pavement, linear feet of fencing, furniture inventories, etc.) so that accurate repair and/or replacement costs can be estimated. Applying market supported useful life parameters and $/unit repair and/or replacement costs to a property’s factual physical counts forms the basis for the funding plan. The condition of each reserve component must be carefully evaluated to determine a realistic remaining useful life. Particular attention should also be paid by the reserve analyst to recognize each association’s individual reserve funding goals, so that the study is not only compliant with applicable legal requirements, but that it also serves the association’s needs as an important management tool.

Hassol: In addition to listing the items to be included, consideration has to be given to their remaining useful life, replacement cost in local labor and material as well as the rates of inflation rates of return on invested dollars.

2) Investment of Reserve Funds: What are the investment options? What are the advantages and disadvantages of each option?

Brubaker: Most associations place their reserve funds in fairly conservative investments, such as certificates of deposit and/or mutual funds. It is not uncommon for larger associations to use the services of professional investment advisors to insure the maximum yield for their reserve funds.

Frazer: All associations must be careful in selecting reserve fund investment options and should consider only conservative investments that will not put their reserve funds at risk.

Hassol: While investment options are infinite, the prudent association errs on the side of fiscal conservatism. Laddered CD’s and Government Bonds are probably the only logical choices and have the advantage of safety without downside risk. Any other option while potentially higher in reward, has the problem of downside risk.

3) Problems of Inadequate Reserves: What financial problems can come about as a result of inadequate reserve funds? What is the effect of misuse of reserve funds on the community association?

Frazer: Inadequate reserve funds can be the result of lack of any reserve contributions, or less than 100 percent reserve funding contributions, misuse of existing reserve funds, or inaccurate information in establishing the needs analysis. Many unit owners are reluctant to see their monthly association fees rise and do not fully understand the necessity for reserve funding. As a result, often, the association board feels pressured and does not collect adequate reserve funds. This is not an uncommon situation, but it does produce long term serious problems. In most cases where inadequate reserves are being collected, the owners will also have to pay substantial special assessments to subsidize the reserve funds in order to pay the bills for reserve expenditures. These scenarios lead to collecting reserves and collecting special assessments.

Brubaker: Improper funding of reserves will almost certainly result in the need to levy a special assessment(s), or require the borrowing of funds from an outside lender. In addition, a prudent buyer will want to know the status of an association’s reserve funds prior to purchase. If there are inadequate reserve funds, the market value of the units may be negatively affected. Misuse of funds earmarked for specific reserve expenses will eventually lead to problems with inadequate reserves, and the possibility of legal liabilities.

Hassol: The simple financial problem of lack of funds and consequent special assessments are the problem from both of these activities. The non-financial risk is delay in doing necessary work which will result in a community with a deteriorating infrastructure. It should be added that misuse carries the additional risk of lawsuits, controversy, and loss of faith towards their board of directors by the homeowners

4) Qualification of a reserve study provider: What qualifications should a good reserve study provider have? What are the advantages of having a professional do the work versus having one of the board members prepare the study? How can we protect ourselves against fraudulent people who claim to be reserve study providers but are not? Is there a website we can visit or a department we can call that gives accreditation to reserve study providers?

Frazer: Every association should seek the services of a professional reserve study provider. The reserve providers qualifications should include a professional affiliation which actively seeks to provide high levels of performance with continuous inspection of the providers work product, quality reports, and integrity of the reserve specialist.

One advantage of selecting a professional reserve provider versus the board members will be the objective point of view, which means a lot when determining financial demands on an association. The professional will be better equipped to establish accurate long term financial planning, which is an essential component of the study.

Any association seeking a professional reserve study provider should start with a professional organization. I would recommend Community Association Institute, a nationally recognized group which provides education to owners of residential property, association board members, property managers, reserve specialists, attorneys, accountants, and management companies. You can access their web site at

Brubaker: To ensure a professionally prepared reserve analysis, make sure that the reserve study provider carries a professional designation(s) recognizing his or her proficiency in preparing reserve studies. The Reserve Specialist (RS) designation, awarded by the Community Associations Institute (, is one such designation. These designations are awarded to reserve study professionals, who, through years of specialized experience, can help ensure that your association prepares its reserve budget as accurately as possible. Designated reserve study providers are bound by professional codes of ethics to provide unbiased reserve analyses. Having an unbiased reserve analysis completed by a professional reserve study provider ensures that the fiduciary responsibility of the property manager, board of directors, etc. has been met and insulates the association from potential liability if their reserve figures are deemed fraudulent or misleading. As is with any service professional, exercise due diligence in choosing a reserve study provider; a designated reserve study professional will provide proof of their professional affiliations, have a lengthy business history, samples of their products, as well as local references with contacts and phone numbers.

Hassol: With all due respect to the well meaning board member, the only advantage I can think of would be a present day cost savings versus a potential future liability. Industry standards have been established by both CAI and APRA (Association of Professional Reserve Analysts). Both have professional designations—RS (Reserve Specialist) for CAI and PRA (Professional Reserve Analyst) by APRA. Reserve Advisor’s is proud to say that more of our staff members hold the RS and PRA designations than any other firm. The CAI website is and APRA is

5) The Reserve Study: What are the elements to the Reserve Study? What makes a Reserve Study a Reserve Study?

Brubaker: A reserve study has two primary analyses: the physical analysis and the financial analysis. The physical analysis consists of a component study that identifies the major repair and/or replacement components of a property, their estimated current and future repair and/or replacement costs and their actual, effective, and remaining useful lives. The financial analysis is a funding study that incorporates information from the component study into a budget plan to fund the anticipated future expenditures. This study is designed to insure that as planned reserve expenditures fall due, adequate monies have been accumulated to fund them.

Hassol: The elements are simply: Listing, quantifying, examining, analyzing, pricing and development of a spreadsheet that incorporates all of these elements. Professionalism and 20 to 30 year projections complete the picture. Specifically, the CAI standard defines Reserve Study as:

A. Physical Analysis

-Component Inventory

-Condition Assessment

-Estimated Useful Life, Remaining Useful Life and Replacement


B. Financial Analysis

-Fund Status

-Funding Plan

6) Percentage of Reserves Funded: What is the importance of this percentage? Should the goal be to get it to 100 percent—why or why not? How can I get it to 100 percent?

Hassol: Funding is always an issue and while 100 percent is desirable, it would depend on the community. Personally, I would rather say funding should be decided after full disclosure. A fully informed community will be able to decide what its comfort level is. I have seen communities that were very content with special assessments as the funding vehicle based on their circumstances. Others insist on 100 percent and still others are comfortable with some number in between. Full disclosure is the key.

Brubaker: In order to ensure that adequate monies are accumulated for planned reserve expenditures, the association should fund their reserve budgets at 100 percent. From association to association, the funding goal may change (sometimes widely). Some associations choose to aggressively fund reserves at or near 100 percent funding, while others choose to waive reserve funding altogether. Others choose to fund at some predetermined percentage (50%, 75%, etc.). Unfortunately, some associations choose to fund their reserves based on a palatable monthly, quarterly, or annual dues increase, rather than on a professional prepared reserve analysis. This shortsighted philosophy will eventually come back to bite the association. A reserve budget funded at less than 100 percent means that at some point, additional monies will be required to either “catch up” to 100 percent funding or pay for an under-funded reserve component that is due at that time. You can pay now, or pay later…This is where the services of a professional reserve study provider can be so valuable.

7) How do we (community association) update our reserve plan? Comments on preventive maintenance and adjusting for the rate of inflation. Should the reserve plan be updated annually or not?

Frazer:Every community association goes through an annual budget process. The process includes budgeting for the normal every day expenses in the operations budget plus the non-annual occurring expenses associated with reserves in the reserve budget. It is important to update both the operations and the reserve budget annually. By preparing a proper budget with adequate funding levels, the association can enjoy a healthy financial position to meet most association financial needs.

Brubaker: The reserve budget should be updated on an annual basis, reflecting current replacement costs for all included reserve components, adjusted remaining useful life estimates, and the new fiscal year’s beginning reserve fund balances. Each year, careful consideration must be given to all facets of the reserve analysis. While the factual data (size of the roofs, linear feet of balcony railings, number of elevators, etc.), may remain the same, it is still the fiduciary responsibility of the association to provide its members with a proper look at the status of their reserves so that informed decisions can be made.

Hassol: Updates are the key but annually is overkill. A fully built out community with no additions to the list of reserve items should consider a review of the numbers for cost and inflation every three years and a site visit is usually not necessary. I would suggest a site visit every other update to be sure there have not been changes to remaining useful life figures.

8) Line Item Account vs. Pooled Account: What are the advantages and disadvantages of both types of accounts?

Brubaker: The Line Item Account (or Straight Line Method, or Component Funding Analysis Method) is preferable for some associations due to the fact that it is relatively easy to prepare and understand. Prior to December 2002, this type of analysis was mandated by the State of Florida for condominiums, cooperatives, and timeshare condominiums, and was also employed by homeowner’s associations, property owner’s associations, churches, clubs, etc. Many associations who continue to estimate their reserves using this methodology do so simply because it is the way they have always done it, which provides a level of comfort. It is still recognized as an acceptable means of estimating reserves and is still commonly utilized. In December 2002, changes in Florida Statute 718 allowed condominium associations to opt for the Cash Flow Analysis, or Pooled Account methodology for estimating full reserve funding in lieu of the Line Item Account method. The Cash Flow Analysis is a method of calculating reserve contributions where contributions to the reserve funds are designed to offset the variable annual expenditures from the reserve fund. Unlike the Component Funding Analysis, which is essentially a snapshot for one fiscal year, the Cash Flow Analysis is a long term reserve analysis that considers such factors as interest income, construction cost and/or inflationary increases for individual components, and an association’s preference with regard to minimum reserve fund balances during the study period. In many cases, conversion to the Cash Flow Analysis method provides full reserve funding at a lower annual contribution rate compared to the Component Funding Analysis method. More and more associations are adopting this methodology on that basis. Neither methodology is inherently “better” than the other, or more credible. The reserve study preparer still has to input proper current and future cost and remaining useful life parameters.

Frazer: Recently, Florida statutes have given condominium associations an option to the restricted category reserve funding. The restricted category funding does not allow the association to use funds from one restricted reserve fund category, for any line item component in a different restricted reserve fund category. This sometimes creates a problem when dollars may be needed to make necessary repairs to a vital component when there are insufficient funds available in that reserve category to pay for the expense.

The new pool of funds account still has all the same reserve components and reserve categories as in the past, but instead of having dedicated roof dollars or painting dollars or paving dollars or any category dollars all of the reserve funds are contained in a single pool of funds. This allows great flexibility in the way the association can use the funds should a sudden unexpected expense arise such as elevator failure or hurricane damage. All reserve funds in a pool account are available for any of the reserve components in any reserve category.

Hassol: Leaving out all the confusion and misunderstanding that exist, the simple fact is that pooling will result in lower annual contributions and a lower initial cost for a proper reserve study.

9) What if we need to borrow from our reserve fund to pay for a shortfall in our operating budget?

Hassol: This is a no-no in Florida and should not be considered without a meeting with a homeowner vote.

Frazer: I recommend an association consult with an attorney if they are considering borrowing from the reserve funds.

Brubaker: Be sure that prior to borrowing monies from any fund to pay for a shortfall in any other fund, whether it be from reserve funds to operating funds, etc., that you consult with a professional property manager, accountant, and/or attorney to be sure that proper legal protocol has been observed

10) What are the applicable laws and recent changes in Florida concerning reserves?

Hassol: When we come to law, I leave comments to the attorneys.

Frazer: One statute that most associations can take advantage of is the way the state allows associations to invest association funds. Community associations in Florida can commingle operating dollars and reserve dollars together for investment purposes. This would allow the association to enter into a larger certificate of deposit with a better rate of interest than if invested in two smaller individual certificates.

An attorney or reserve professional should always be consulted if there is a question or doubt, as there are many laws concerning reserves, and they can change fairly frequently.