How To: Using a Reserve Study
A Reserve Study is a financial report planning tool designed to provide a homeowners association (HOA) with a structured funding plan for replacing common elements as defined in the community declarations. A common misconception among community managers is that reserve studies serve as detailed life-expectancy or physical inspection reports. In reality, a Reserve Study is not a substitute for a professional inspection or contractor bid - it is primarily a financial management tool.
If a Reserve Study is not a component inspection report, how should it be used effectively?
Like most financial tools, a Reserve Study should be reviewed annually during the budget preparation process. Although budgeting the reserve expenses and contribution allows for flexibility, it serves as a roadmap for capital projects scheduled in the upcoming fiscal year. Reviewing the study alongside the annual budget enables associations to update projected year-end balances, adjust for future reserve levels, and fine-tune funding strategies as needed.
Below is a checklist outlining best practices for conducting regular Reserve Study reviews. If your community has not yet established an annual Reserve Study review, consider incorporating these steps into your standard budgeting workflow:
Prior Year End Balance: Review the actual year-end balances from the past 1-2 fiscal years. Verifying these figures ensures your starting balance fro the upcoming fiscal year is accurate, preventing cascading errors in future projections.
Beginning Balance + Reserve Contributions - Capital Project Expenses = Year-End Balance
Component Review (Prior Year Projects): Audit capital projects completed during the prior fiscal year. If all projects were executed as planned, actual expenses should match your updated ending balance.
If any planned capital projects were not completed, determine whether they should be deferred to the next fiscal year or further out and re-evaluate their scope and cost.
Component Review (Upcoming Projects): Examine capital projects planned for the next fiscal year. Replace estimated costs with actual vendor proposals or preliminary contractor estimates. Most contractors (such as roofers) will provide budget quotes in advance to help refine your figures.
Upcoming Year-End Balance: Calculate the projected year-end balance after adjusting for updated expenses. If the balance shows a deficit (“in the red”), consider deferring projects or planning a special assessment.
5 - 10 Year Balance Horizon: Analyze projected balances for the next 5 to 10 years. If projected year-end balances dip below zero in any future year, adjust your annual contribution rate in the current budget to account for the shortfall.
Funding & Contribution Adjustments: Use current and multi-year projections to determine appropriate reserve contributions. Small, incremental contribution adjustments (e.g., increasing annual contributions from +3% to +4%) made with sufficient lead time can prevent the need for abrupt special assessments later.
Budget Integration: Aligning Reserve Study reviews with the annual budget process ensures any necessary funding increases are seamlessly incorporated into the upcoming year’s financial plan.
Ideally, reserve study data should be maintained in a spreadsheet or specialized software. This ensures that updates to current or prior year calculations automatically cascade through future years and allows for clearer reporting to the Board and homeowners.
While Colorado law does not mandate reserve studies for homeowners associations, state legislators frequently discuss the topic. Even without a formal study, following these review steps during your annual budgeting process will promote financial stability and help position your community for success.
If your HOA currently lacks a reserve study, consult your community management company about hiring a specialist to prepare one. If you are seeking new management in Summit County, Colorado, feel free to request a proposal from us here.