Reserve studies are essential for all community associations. Generally, a reserve study is divided into different levels. Understanding each level is key to ensuring a fully optimized reserve study. Read further to understand what a reserve study is and its different levels.
What is a Reserve Study?
A reserve study is a long-term capital budgeting tool that an association uses to determine the amount of money it should set aside for replacements, repairs, and restorations.
Reserve studies also help to assess and analyze the association's physical property's state and condition (Physical Analysis). It uncovers the current state of the association's reserve funds (Financial Analysis). A reserve study also allows the board of directors to analyze the reserve fund's overall strength.
What Are the Different Levels of Reserve Studies?
Generally, a reserve study is divided into different levels. Understanding each level is key to ensuring a fully optimized reserve study. These various levels can be confusing to board and association members.
Choosing and implementing the ideal reserve study service ensures that the study works best for your association.
The Community Associations Institute defines reserve studies into four levels. Understanding the scope of each reserve study level and how they can contribute to your association's success is a key factor.
These levels include:
Level I Reserve Study
The level I reserve study—also known as Full reserve study—is the most extensive and therefore often the most expensive option. It is the most comprehensive study availed to associations and includes:
- Component inventory development
- Condition assessments
- Life and value estimates.
Level I reserve study includes an on-site visual inspection of every component and an in-depth analysis of the association's reserve funds.
A collaboration between these two aspects helps to formulate a capital plan. The findings of this study are compiled into a reserve study report to be used for further analysis.
Furthermore, your reserve fund's status is analyzed against the need for replacements and repairs. Subsequently, a funding plan is developed.
A Level I reserve study is most applicable if you have never conducted reserve studies or plenty of time has elapsed since you conducted a comprehensive Full reserve study.
Level II Reserve Study
The level II reserve study, also called Update with Visual Site Visit, is less comprehensive than the Level 1 study. This report updates the Financial Analysis and Physical Analysis of an existing report.
Under this level, a site inspection is conducted to verify or make adjustments to the existing Condition Assessments, Component List, Useful Life, and component Valuation Estimates.
It also involves updating the Financial Analysis, including the recommended Funding Plan and the current Fund Status. The Level II reserve study is recommended every three years or as required by state law or before and after major projects.
Level III Reserve Study
It is also referred to as an Update of reserve study without a visual site visit. This is an update of a previous Level 1 or Level 2 study. However, it doesn't include a site visit since it updates Financial Analysis only.
The level 3 reserve study is recommended to adjust, review, and verify that the existing funding plan is precise and suitable for the current economic environment.
Level IV Reserve Study
Though not always possible, a Level 4 reserve study applies strictly to communities that haven't been constructed. Since there are no physical properties to assess, this service level functions purely as a capital planning tool for developers to plan adequate reserves.
HOA Reserve Studies Best Practices
It is best practice for an association to conduct reserve studies regularly—at least once every few years.
Another best practice is to hire a professional to conduct the reserve study to evaluate the association amenities' conditions efficiently. However, before hiring a professional to conduct the different levels of reserve studies, ensure they have the requisite training and certifications.