Reserve Studies of some type have been done for over half a century now for many common-interest-developments. Prior to that, in some situations, maybe an abacus or pencil and paper process was attempted. The studies became simpler to do and more efficient to produce when spreadsheets came to life in the 80’s. The first version of professional cash management of reserve funds for owner associations and resorts was introduced in 1983. And surprisingly, the first cash flows projections weren’t presented until 1989.

In the 60’s, when a common-interest-development property was in the planning stages, some proactive State’s Departments of Real Estate required documentation for budgeting and disclosure purposes as to the amount potential owners would be paying for operating and maintaining the property. As we know them today, “maintenance fees” for the daily operations and reserves for the long-term maintenance and replacement of the physical common areas. Originally, the Reserve Study report was intended to be an independent (arms-length, third party) opinion at a specific point in time regarding the condition of the property, common areas and the individual assets or reserve items that made up the property. This would be similar to the concept of a CPA’s audit opinion on the financial position of a company.

Furthermore, the study accounted for the balance of existing reserve funds and calculated how much would be needed from the owners to pay for reserve items that would require maintenance or replacement in the future. The conclusions and the report were basically done with no involvement from the association’s board of directors, management, or any other advisors.

In the 90’s, Reserve Studies started to change noticeably. With dramatic changes in the economy, many boards of directors and management personnel became more involved in the end product report with participation on the assumptions used for inflation, interest earned, annual contribution increases, or the occasional “we are not raising the dues” no matter what the report says input from board members. The professional Reserve Study preparer was primarily relied upon for estimated lives, costs and the approximate timing of when maintenance or replacement would be needed next. This of course was questioned by many boards of directors as to, “how can we extend the lives of the reserve items”, or “even change the assumptions so we do not have to raise dues”. In many situations globally, this is still the case today. 

So what is changing? And is the static reserve study metamorphosing into a dynamic, “living-breathing” process and a valuable financial planning tool for the future? The fact is, the world is a different place than it was 50 years ago and today there is a dramatic difference between the original Reserve Study and the developing Reserve Management Plan.

Where a Reserve Study is basically an independent report done once every few years, a Reserve Management Plan incorporates not only the involvement of the board of directors and management, it also incorporates cutting edge technology, real-time analysis, access and expertise from various other professionals.

A Reserve Study is what a professional reserve study preparer’s opinion is, where the Reserve Management Plan is an ongoing collaboration of what the intent, or plan is, of the board of directors and management today, tomorrow and into the future.

In other words, a Reserve Study is a snapshot or the view from 20,000 feet while the Reserve Management Plan starts at ground level, allows one to get off the ground safely and fly confidently at a cruising altitude with more end user intent, detail and useful managerial information. 

The first thing the board of directors and management must determine is what is the end purpose the report? Is it purely for internal purposes, is it being required by a lender for the association to borrow money, for individual owners trying to meet refinance requirements, or owners trying to sell to potential buyers? This will determine if an independent Reserve Study is needed or a collaborated Reserve Management Plan. 

In the summary narrative of the report it should disclose that it is an independent (arms-length, third party) opinion, or a collaboration with the board of directors, management, or any other advisors. It should continue to state the scope, intent, and how the data was originated. Also, the method used for calculating the current and projected year’s owner’s contributions, and that these calculated contributions provide a plan to assure that reserve funds will be available when needed in the future. 

Where a Reserve Study might be considered one dimensional, a Reserve Management Plan can extend to including other useful managerial information:

• How reserve funds can be invested to maximize the return on investment
• Calculating individual owner contributions based on unit type or location by size, percentages, entitlements, weeks or points (timeshare/vacation ownership)
• Financial planning for underfunded owner associations that need to borrow money, special assessments, or a combination of both
• Different tracking methods that fit the desired intent and timing of reserve fund expenditures
• Documentation and compliance of the American Disability Act (ADA)

One of the biggest challenges for reserve (funds and items) analysis and reporting has been for the timeshare/vacation ownership industry. Typically, two-thirds of the total replacement/maintenance costs for a property are related to the unit interiors with common area items being the balance. Pre-planning of these types of property is extremely important for reserve consultants or the exercise can turn into “a runaway train”. Unless there is some type of understanding of what the board of directors and management are expecting, the odds are very slim that the end report will meet expectations.

Reserve consultants, management, or other advisors are the first line of education for owner associations and board of directors. The services available should be explained along with the mechanics of a Reserve Study and a Reserve Management Plan and their differences. Also, that the end services and report costs to the owner association will vary based upon what has been requested and agreed upon.

You do get what you pay for. If the board of directors is just trying to meet some requirement, then they will go with the least expensive option. But a conscientious board of directors will consider what managerial information they need to make proper decisions in the interest of all the owners.