Understanding Reserve Studies

By Patty Thornberry, Parthenon Commercial Corp

What is it?

A reserve study is a two-part review of a property/association comprised of the following: (i) an assessment of the physical condition of assets, and (ii) a review of financial status (e.g., current reserve balances and previous expenditures). These two components help determine how much should be collected from owners/members to ensure ongoing financial stability.

Why should your clients obtain reserve studies?

There are both practical and legal concerns making reserve studies a good idea. Reserve studies will aid in planning for future expenditures and ensure there is enough money in the appropriate accounts to cover expenditures without requiring special assessments and/or loans to maintain the property. Additionally, some states require reserve studies by statute. Even if the property is in a state that does not expressly require reserve studies, a study is still prudent to meet legal duties imposed on the board of directors (i.e., a failure to perform reserve studies followed by a material under-funding of applicable accounts will create a higher likelihood of personal liability imposed on board members).