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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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