What is a Reserve Study & Why is it Important? - LBPM

What is a Reserve Study & Why is it Important?

What is a Reserve Study & Why is it Important?

A reserve study is a detailed report that assists common interest developments (CID) in planning for long-term common area repair and replacement expenses. A CID exists when there is individual ownership of a house or condominium along with the shared ownership or right of use to common areas. These common areas can include streets, roofs, recreational facilities and many other items.  A reserve study includes two parts:

1) The Physical Analysis contains information about the condition and repair/replacement cost of the components that the CID maintains.  The physical analysis should include a component inventory and quantities, estimated useful and remaining lives, and estimated replacement costs.

2) The Financial Analysis evaluates the CID’s reserve fund balance and income.  The financial analysis calculates a CID’s percent funded by comparing the actual reserve balance to a fully funded balance.  The reserve study then estimates the total annual contribution necessary to defray the future costs.

A reserve study is a detailed inventory of all of the components that a CID will need to repair or replace.  It also lists what will need to be done to maintain these components, when this maintenance will need to be done, and what the cost will be.  In addition, a reserve study calculates the required monthly contribution for each owner so that the needed funds will be available to perform the repairs and replacements.  It also calculates how much a CID should currently have in its reserve account.

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