CAPITAL RESERVE STUDY
CAPITAL RESERVE STUDY Austin, TX
A Capital Reserve Study is just a long term capital replacement budget. The end product is the Capital Reserve Study report, though, supported by a site observation & component condition assessment.
The purpose of this report is to create a financial forecast, a funding plan (if you may), for the association that estimates the timing and cost of future major repairs and replacements to the association’s standard area components. The homeowner’s association industry has coined the term reserve study, and outside of this industry, it’s generally referred to as a long-term capital replacement budget. The homeowner’s association uses this report to determine the annual member assessments. Further, this report is also necessary to provide funding for the estimated future expenditures.
What is a Capital Reserve Study?
The site visit is a limited scope of visual observation of the association’s standard area components. However, sometimes, it doesn’t include destructive or invasive testing. The site visit’s primary purpose is to identify common area components, evaluate their condition, determine useful life & remaining useful life, and estimate the major repairs or replacement cost.
Moreover, the main purpose of a Capital Reserve Study is to offer recommendations as to the amount of money a community, building, or any other organization should set aside every year for a major refurbishment or the future replacement of their commonly owned elements.
At Home Pro, we believe that a properly funded capital reserve program is the right formula for keeping a community’s physical assets in prime condition. At the same time, it provides some critical benefits to residents. We also strongly recommend that you should update your Capital Reserve Study every 3 years.
A regularly updated Capital Reserve Study can provide the following benefits:
- Reduce the likelihood of member dissatisfaction associated with the passage of large or sudden assessments.
- Increase your property’s values by maintaining exterior appearances through timely repair or replacement of common elements.
- Facilitate in project efficiency and cost-effectiveness, along with minimizing disruptions and unit owner inconvenience by allowing the association to secure contractors to complete an entire project during a finite and desired schedule.
Home Pro Inspections has prepared many Reserve Studies. Each Capital Reserve Study we perform consists of a customized analysis, developed in coordination with a Reserve Specialist (RS) and you, our client. Plus, it is based on a “real-world” methodology for each item in regards to:
- Evaluation of anticipated ‘useful life.’
- Evaluation for repair or replacement
- Integrated into a replacement or repair plan and budget
Home Pro Inspections is Redefining Capital Reserve Studies
At Home Pro Inspections, we will help you to establish appropriate capital budgeting policies. Not only that, but we’ll also discuss your funding goals with you, as well as your opinions regarding interest & inflation rates to be used in the funding plan. More importantly, we’ll also discuss how to set the scope of the study to produce the proper level of component detail so that all the reports match your expectations.
You’ll also see that our Capital Reserve Study reports and component database are different from what is commonly seen in the industry. Components at a macro level must be accumulated, meaning many individual minor components are ‘grouped’ into a single line item identified as a ‘component’ for purposes of reporting in the Reserve Study report.
We provide Financial Planning for your property
Capital Reserve Studies by Home Pro Inspection can improve your property’s facilities management and financial planning by providing a clear & understandable funding plan for future replacement of capital items.
Proper planning for future replacement of items such as roofs, mechanical systems, and asphalt paving requires a proper assessment of future costs as well as an analysis of the life expectancy of all these items based on the current physical condition. Don’t worry, if all this seems a little complex, our professionals will assist you in developing a financial funding plan that works best for your property.
Capital Reserve Studies by Home Pro Inspections are quite intuitive & definitely easy to read, and our analysis & recommendations for Reserves are compliant with the Association of Professional Reserve Analysts requirements & CAI Reserve Specialist.
Our reports may also include photographs of the various capital item components included in the Reserve Study & comments containing information specific to your community along with recommendations for necessary maintenance.
Generally, we can provide a draft of your report immediately after our onsite inspection of your facility.
We prepare Capital Reserve Studies for:
- Homeowner Associations
- Commercial Properties
- Industrial Complexes
- Hospital/Healthcare Facilities
- Religious Institutions
- Time Share Developments
- Hotel and Motel Complexes
- Outdoor Resorts
Our Capital Reserve Study features include:
- User friendly and easily understood
- Provide 30-year cash flow scenarios
- Based on industry-standard cost estimating
- To determine the necessary annual contribution to the reserve fund, we provide two industry-standard calculation methods
Our best in class professionals can:
- Prepare corrective details and designs in CAD
- Assist you in determining the most suitable course of action
- Quickly provide immediate inspection services to assess the condition of your facilities
Does your association need to have a reserve study?
Every association that has a common area component should undoubtedly perform reserve study periodically. Unless mandated by state law, ‘periodically’ may vary from one association to another based upon their particular requirements.
The states that have established specific reserve statutes generally require that a reserve study should be performed on a 3 to 5-year cycle. But we believe that 5 years is probably too long for any association.
Even 3 years may prove to be too long for the association if it is performing several major repair and replacement activities as information can become outdated very quickly. Thus, we recommend that associations should perform an update of their reserve study without site inspection for every year when no site inspection is performed.
For homeowner’s associations located in states where specific reserve study statutes have been enacted, they must comply with that state’s law. However, even if there is no state law, it is still a prudent business policy to perform a reserve study. Although in most states, Association directors are subject to what is known as ‘the prudent businessman rule.’
Simply put, this means that if a prudent person in business would perform an act, then the Association director should perform the same action. In our opinion, no one would operate his business without performing some sort of long-term capital replacement budget. Therefore, we conclude that every association should perform a reserve study periodically.
Well, get this, in today’s economy; the reserve study is often forced upon the association by the requirements of property buyers or lenders.
Four things we want everyone to know about Capital Reserve Studies
- A Capital Reserve Study is first and foremost a budgeting tool for future repairs, replacement & restoration of the common elements of a Common Interest Property.
- A Capital Reserve Study includes both a Physical Analysis and a Financial Analysis.
A thorough ‘Physical Analysis’ includes:
- A Condition Assessment of each common element (i.e., Poor Good, Fair,) with an estimate of the remaining “Useful Life.” The assessment might also include a review of all maintenance procedures & contracts with observations of deficiencies and recommendations for improvement.
- A Component Inventory of all common elements having a predictable useful life of 30 years or less. The inventory is expressed in one of several unit quantity measures, such as square feet, linear feet, each, lump sum, etc.
- Current Cost Estimates for future repairs, replacement & restoration of the common elements.
A thorough ‘Financial Analysis’ includes:
- An assessment of the Reserve Fund Status expressed as % of Fully Funded. The term ‘Fully Funded’ is best defined as the used up or depreciated amount of the value of the common elements. If everything goes perfectly, the Reserve Fund amount will always be equal to the used-up portion of its component assets.
- A Funding Plan prepared using either the often preferred Pooled (cash flow) Method or the Component (straight line) Method. As the name implies, the Pooled Method groups all the standard elements into a single fund and covers anticipated expenditures for repair, replacement & restoration over the Remaining Useful Life of any asset within the pool. Further, the Pooled Method includes provisions for both inflation & earned interest. Additionally, multiple Funding Plan alternatives could be on offer for consideration.
A thorough Capital Reserve Study, with additional bonuses, is a collaboration of our Reserve Analyst’s team of civil, mechanical, structural, landscape, electrical, and financial professionals with the client’s team of owners, property management & maintenance staff.
Please feel free to contact us for more information. Home Pro Inspections is one of the leading Home Inspection company in Austin, Texas and surrounding areas located in Buda, Texas. Over the years, we have provided home buyers and owners with fruitful information to make better decisions.