Association reserves play an essential role in the long-term sustainability of a community. Board members must understand how to manage reserves, determine the right funding level, and ensure compliance with state laws.
What are Association Reserves?
Homeowners associations rely on regular dues to fund day-to-day expenses. For the cost of major repairs or replacements, on the other hand, communities turn to their reserves.
Association reserves are essentially a savings account for future needs. These funds are set aside to cover the cost of repairs or replacements when components inevitably fail. Since no two communities are exactly alike, the amount of reserves an association should have can also vary. To determine the right funding level, a reserve study is necessary.
What is an HOA Reserve Study?
A homeowners association reserve study assesses a community’s assets, both physical and financial, to arrive at a funding plan.
To conduct a study, a specialist analyzes the physical condition of major components, estimates their remaining useful life, and anticipates the cost of repairs or replacements. From there, the specialist determines how much the association must set aside every year to cover these costs.
For example, if a roof is set to deteriorate in 10 years, and it costs $10,000 to replace, then an HOA would have to save $1,000 every year. This is the most basic example, of course, as estimates and funding plans tend to be more complex than that.
The Benefits of an HOA Reserve Study
A reserve study poses several advantages, including preventing special assessments, enhancing financial planning, ensuring fair contributions, and preserving property values. Let’s discuss these below.
1. Prevent Special Assessments
Association reserves are used to pay for the cost of major repairs and replacements in the future. Without them, an association would have to significantly raise dues or levy large special assessments to meet funding requirements.
Some associations take out loans to pay for emergency repairs, but loans are not a long-term solution. Boards must still scrounge up enough money to pay these loans back, along with interest. In the end, most associations will still turn to a dues increase or special assessments.
2. Enhance Financial Planning
A reserve study offers an in-depth look at the association’s financial condition, making it a valuable planning tool. With this study, board members can anticipate needs more accurately and abide by a funding plan that will safeguard the community’s finances.
3. Ensure Fair Contributions
Homeowners are responsible for funding the association’s reserves. The HOA board determines monthly dues, with a portion of these dues allocated to the reserve account. A reserve study comes with a structured funding plan, which the board can follow to ensure that everyone contributes to the fund fairly.
4. Preserve Property Values
A reserve study supports a well-funded reserve account, which, in turn, supports long-term maintenance and repairs. When the board ensures that common areas remain functional, property values remain high.
Three Types of Reserve Studies
Reserve studies come in three forms: a full reserve study, an update with a site visit, and an update without a site visit. To determine which one best suits an association’s needs, it is important to understand the scope of each one.
- Full Reserve Study. This is the most comprehensive and, therefore, the most expensive option. As its name suggests, a full study involves a detailed analysis of the community’s physical and financial assets. It also comes with a structured funding plan, telling the board how much it needs to set aside every year to ensure sustainability.
- Update With a Site Visit. This option is less extensive than a full study but still comes with a physical examination of the association’s assets. A specialist will also make adjustments to the funding plan based on the new findings.
- Update Without a Site Visit. The least detailed, this option only involves a financial update. It focuses on taking existing data and adjusting the funding plan according to economic changes. It doesn’t come with a physical inspection.
Communities that have never had a reserve study performed are recommended to do a full one, with an update every couple of years. Many associations redo the full study every five years to ensure accuracy.
Are Reserve Studies Required in Illinois?
In Illinois, homeowners associations are not legally required to perform reserve studies. That said, as per 765 ILCS 160/1-30, if an HOA does have one, the board must make it available to members for examination.
State law is not the only thing to consider. Associations may have their own HOA reserve requirements according to their governing documents. Board members must check their CC&Rs and bylaws to confirm if a reserve study is mandatory.
Even if there is no requirement to conduct a reserve study, it is still within the association’s best interest to have one anyway. This study helps communities lock down a funding plan for major assets. Lenders and insurers also tend to favor associations with updated reserve studies.
Is a Condo Reserve Study Required in Illinois?
Condo associations operate differently from single-family developments. These associations tend to have broader maintenance obligations, with more shared elements than their counterparts.
In COAs, the board must oversee maintenance of hallways, lobbies, elevators, walls, stairwells, and the exterior structure of the building. Maintenance responsibilities also extend to the roof, common amenities, and shared plumbing and electrical systems.
Because condominiums have more shared elements, a reserve study is even more imperative. That said, Illinois law currently does not require COAs to perform a reserve study. While condos are required to fund reserves, these associations can waive the requirement with a vote if it’s not in the governing documents.
Still, boards would be wise to perform a reserve study for the condo association anyway. After all, this study supports smart financial planning and long-term stability.
How Much is an HOA Reserve Study?
There are several factors that can affect the cost of a reserve study. The association’s size, structure, and the extent and complexity of common elements can all influence the price. Moreover, it will also depend on the type of reserve study, with full studies costing the most.
Smaller communities with fewer common elements should allocate around $2,500 to $5,000 for a full reserve study. On the other hand, medium-size communities should expect to pay $5,000 to $10,000. For larger communities with more complex elements, a full study should cost around $10,000 or more.
A Wise Move
Association reserves act as the first line of defense when major repairs or replacements come up, especially if they aren’t covered by insurance. Even without a statutory requirement, it’s a good idea to maintain reserves and conduct a reserve study to protect the association’s finances in the long run.
Forth Group provides HOA financial management services to communities in Chicago and the surrounding areas. Call us today at (312) 379-0400 or contact us online to get started!
RELATED ARTICLES:
- HOA Financial Statements Board Members Should Review Regularly
- HOA Special Assessments: Do Homeowners Need To Pay Them And Why?
- Condo Master Insurance Policy vs HO-6