How to Read a Condo Reserve Study

A condo reserve study can run to dozens of pages, and most boards only read the summary. That’s a fair place to start, but the summary rests on a few choices made deeper in the report. Here is what to check, in order.

1. The component list

This is the list of shared parts the association has to repair or replace, such as roofs, paint, elevators, paving and hallway carpet. For each one, the study should give a quantity, a current cost, a useful life and a remaining life. California’s reserve summary asks for “the current estimated replacement cost, estimated remaining life, and estimated useful life of each major component.”

Questions to ask:

• Is anything missing? Compare the list with what you walk past every day. Pipes, balconies and garage items are often left out.
• Is anything there that shouldn’t be? Parts the owners maintain don’t belong in the general reserve. Our guide to who pays for what in a condo explains why.
• Do the remaining lives match what you see? If the roof leaks now and the study gives it 12 more years, ask why.

2. Funding status and percent funded

Two numbers matter here: the cash the association has set aside, and the amount the study says it should have by now, given the wear so far. Percent funded is the first divided by the second. California’s summary calls for “the current amount of accumulated cash reserves” and the percentage that amount is of the target. It also asks for “the current deficiency in reserve funding expressed on a per unit basis.”

A low percentage doesn’t mean the association will run out next year. A high one doesn’t mean it never will. It’s a snapshot. The funding plan tells you more.

3. The funding plan

This is the schedule of what the association would put into reserves each year. California requires the plan to include “a schedule of the date and amount of any change in regular or special assessments” needed to fund it. Washington’s statute asks for 30-year projected balances “based on each funding plan presented in the reserve study.”

Look at the projected balance for every year, especially the low points. If the balance dips close to zero in a year with a big project, the plan has very little room for a cost surprise. A plan with steady, modest increases is usually easier to explain to owners than one with a sudden jump.

The board, not the study preparer, decides which plan to adopt. In California, any assessment increase needed for the plan has to be approved in a separate board action.

4. The assumptions

Every study assumes an inflation rate for costs and an interest rate for the money in reserves. California’s disclosure form asks for both: “the assumed long-term before-tax interest rate” and the inflation rate applied to repair and replacement costs. Washington’s reserve study must state its “interest and inflation assumptions.”

These matter more than they look. A study that assumes high interest and low inflation will show less need for savings. Ask the preparer how each rate was chosen, and what the plan looks like if inflation runs one point higher.

Warning signs

• The study doesn’t say whether anyone visited the property, or when.
• Costs have no stated source or date.
• The component list hasn’t changed since the last study, even though work was done.
• Remaining lives were pushed out across the board with no reason given.
• The summary page and the detailed tables disagree.

What to do next

Bring your questions to the preparer before the board adopts a budget. If the last study is more than a few years old, or a big project is close, see whether you need a new study or an update. You can also test your own numbers in the runway calculator, or see how our condo reserve studies lay out each of these parts in the sample report.