Reserve Studies FAQ

Per National Reserve Study Standards, a Reserve Study is a budget planning tool that identifies:

• the components a community association is responsible for maintaining or replacing,
• the status of the reserve fund,
• a stable and equitable funding plan to offset the anticipated future major common area expenditures.

By aligning funding with ongoing deterioration, a Reserve Study helps associations avoid financial surprises, spreads out the funding fairly over the homeowners over the years, minimizes special assessments, and ensures that major projects can be accomplished in a timely manner.

Special Assessment is a term used in Association-governed communities to describe a temporary, unplanned financial assessment levied upon the members of an Association. Sometimes it is accomplished based on a Board mandate, sometimes on the basis of a membership vote. A special assessment can be a single lump sum demand by the Association, or collected in multiple payments over time.

Sometimes the need for a special assessment comes about due to misfortune to address an immediate need (to pay a large insurance deductible, a non-insured loss, or another unexpected expense), but most Special Assessments are levied to compensate for poor financial planning (i.e., failing to set aside sufficient funds in advance for predictable reserve expenses). Funding reserves through special assessments should be avoided because they unfairly penalize one unlucky set of Association owners at a particular point in time, instead of spreading the ongoing cost of deterioration over all the owners, on an ongoing basis, while they were enjoying the use of those assets.

The Governing Documents of most Association-governed communities require the Board of Directors to set aside an “appropriate” amount of money on a regular basis to provide for the costs associated with the ongoing deterioration of the common areas. Guessing about such a significant budget line item (that is commonly in the range of 25% of total budget) is frankly irresponsible. So boards turn to a Reserve Study for guidance. Mother Nature and Father Time dictate that all physical assets deteriorate with time, and most of that deterioration is very predictable. A credible, current Reserve Study makes it possible to know what projects are coming, how much they’ll cost, and in comparison to how much cash is currently on hand, how much they’ll need to set aside to prepare financially to accomplish those projects on time (avoiding the high cost of deferred maintenance and its deteriorating effect on property values). The alternative is destabilizing special assessments or the high cost of a loan. Fundamentally, a Reserve Study helps an association not be surprised by major projects that should not be surprising.

National Reserve Study Standards were established in 1998 by the Community Associations Institute (CAI) to provide consistent terminology, standardize the levels of Reserve Study services, create a common set of calculations, create standardized disclosures to be found within the Reserve Study, and establish the Reserve Specialist (RS) credential program. They were most recently updated in 2023. See them here.

The Reserve Specialist (RS™) designation was created by the Community Associations Institute in 1998 to improve the quality of Reserve Studies nationwide. Obtaining the designation demonstrates a level of competency in assessing, evaluating, and quantifying major elements of a property (association), financial analysis, and report writing (communication).

A person holding the RS™ designation, which must be renewed every three years, is achieved through demonstrating a multi-yr background of education and experience, a sufficient volume of experience preparing Reserve Studies over the prior three years, and demonstrating adherence to standardized calculations, terminology, and disclosures in their Reserve Study work-product.

Every Reserve Study provides three key pieces of information, useful for both annual budget planning and disclosure purposes. The results are articulated in National Reserve Study Standards:

• What you are reserving for (also known as the Component List)
• Strength of the Reserve Fund (also known as Percent Funded)
• Recommended Funding Plan

In other words, your Reserve Study will tell you which projects are upcoming, how much are they projected to cost, and when will they happen. You’ll also learn how your current Reserve Fund compares to your upcoming projects (are we well prepared, doing ok, or behind?) and you’ll learn how much you need to transfer to Reserves on a regular basis, given your financial starting point, to prepare for your upcoming projects.

Since a Reserve Study is a budget planning tool, most properties start the process by soliciting a Reserve Study proposal six or more months in advance of their Fiscal Year (FY) End. This gives the Leadership at the property a month or two to select a Reserve Specialist, a month or two to get the Reserve Study done, a month to review the completed report, and sufficient time communicate the important disclosures to members in year-end communication, and adequate time to incorporate the funding recommendations into the budget for the upcoming Fiscal Year.

Over the last 10 years, the average cost of one of our professional Reserve Studies was .84% of the association’s annual budget (slightly less than 1%). For your association, note that there are six factors that will determine the cost of your Reserve Study:

1. Level of Service (Full Reserve Study, Update With-Site Visit Reserve Study, or Update No-Site-Visit Reserve Study)
2. Complexity of Property
3. Size of Property (# units, # buildings, acreage, etal)
4. Location of Property (for site inspection- based Reserve Studies… distance from one of our regional offices)
5. Time of Year (busy-season or off-season)*
6. Turnaround Time

* Reserve Studies are prepared in advance of the Fiscal Year. Since most properties operate on a Dec 31 Fiscal Year End, “off-season” for Reserve Specialists generally means Dec-May while “busy-season” generally means Jun-Nov.

A Reserve Fund balance that is adequate for one property is not necessarily adequate for another, or even for similar properties of differing ages. But when a property’s current Reserve balance is compared to the cash value of its common area deterioration, it yields a useful relative measure called “Percent Funded”. This measure of how well a Reserve Fund compares to the $ value of its common area project deterioration reliably divides associations into three ranges:

• 0-30% “weak” range where special assessments are common (34% of properties)
• 30-70% “fair” range where special assessments are infrequent (40% of properties)
• 70% and above, the “strong” range where special assessments are rare. (26% of properties)

Mathematically:

Percent Funded = Current (or projected) Reserve Balance / the value of common area project deterioration at the association (the “Fully Funded Balance”)

Percent Funded has been a reliable measure of Reserve Fund (Balance) strength since it was documented in National Reserve Study Standards in 1998.

Read it here (see p3). To summarize, it changes things in two ways:

For a home mortgage in a condo to qualify through Fannie Mae & Freddie Mac (thus earning most favorable rates with lenders), their minimum standard for funding Reserves increased from 10% of annual budget to 15% of annual budget (effective Jan 4, 2027).

For those prospective condo mortgagees seeking an exception to the above “% of budget” rule by providing evidence from a Reserve Study demonstrating less funding is sufficient, as of Aug 3, 2026 a Funding Rate pursuing a Baseline Funding objective will not be considered acceptable evidence. The association needs to be pursuing the highest (unstated) objective found in that Reserve Study. In other words, lenders are not impressed with associations pursuing bare-minimum standards. Lenders justifiably want to ensure the financial security of the property they are lending against.

We have observed that to offset ongoing deterioration, most associations need to transfer 15-45% of their total budget to Reserves on an ongoing basis. This means that there are very few associations of any type where funding Reserves less than 15% of total budget is sufficient. So for the associations legitimately funding their Reserves, this increase from 10% to 15% is a non-issue.