What
is a Reserve Study?
A Reserve Study is a summary used by common interest developments to disclose the financial standing of the reserves in compliance with California Civil Code 1365.5. TROWER provides a Reserve Study that contains a physical inspection and a funding analysis section. Future annual accounting and physical inspection updates are available at reduced cost.
Civil Code Overview
The Board
of Directors must conduct a physical
Reserve Study every third year when the
current replacement cost of the common
area components is equal to or greater
than one-half of the Association's
budget. The Directors should review the
study annually to make adjustments or
contract an outside firm to review the
update. Legislation requires that the
minimum standards for the content of the
Reserve Study include:
| 1. Common area
components the association is
responsible to maintain that
have a useful life of less than
30 years. |
| 2. The expected useful life
and remaining life of each
component as of the date of the
study. |
| 3. Current and future cost
estimates for repair and
replacement of each component. |
| 4. An estimate of the total
annual contribution required to
fund the repair and replacement
of these components after
consideration of the existing
Association reserves (Amendment
to Civil Code 1365.5). |
The
annual operating budget must have a
summary of the reserves to include:
| 1. The estimated
current and future replacement
costs of each component. |
| 2. The normal and remaining
life of each component. |
| 3. Recommended cash in
reserves compared to expected
cash in reserves at the fiscal
year end. |
| 4. Percentage of expected
cash in reserves compared to
recommended cash in reserves
(Amendment Civil Code 1365.5). |
Use reserve funds for the repair and
replacement of the common area
components or for expenses connected
with construction defect litigation
(Amendment Civil Code 1365.5).
Reserve Study Necessity
Why does an Association need a Reserve Study?
The Association must perform a Reserve Study by law every third year.
The board must review the Reserve Study annually. In California there is
currently no requirement to fund the reserves only the need to disclose
the financial standing of the reserves to current owners, potential
buyers and lenders. A Reserve Study may:
| 1. Reduce property
deterioration. |
| 2. Enhance property values
through pride of ownership. |
| 3. Provide a basis for
implementation of a preventative
maintenance program. |
| 4. Avoid special assessments. |
The
Directors have a fiduciary responsible
of operating the Association in a
reasonable and prudent manner. The
Association may adjust replacement
reserve assessments annually to take
into account any changes. The
Directors must attest to the adequacy
of the reserve funds and declare if
they anticipate a reserve increase or
a special assessment.
A Reserve Study is a planning tool for
any association which assists the
Directors in complying with California
Civil Code 1365 by providing reserve
information needed in the annual
budgeting process.
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