Reasons to Conduct a Reserve Study

𝐃𝐨𝐞𝐬 𝐲𝐨𝐮𝐫 𝐨𝐫𝐠𝐚𝐧𝐢𝐳𝐚𝐭𝐢𝐨𝐧 𝐨𝐰𝐧 𝐚 𝐩𝐫𝐨𝐩𝐞𝐫𝐭𝐲 𝐨𝐫 𝐦𝐮𝐥𝐭𝐢𝐩𝐥𝐞 𝐩𝐫𝐨𝐩𝐞𝐫𝐭𝐢𝐞𝐬? If so, have you ever thought about or have you conducted a reserve study?

A reserve study is a comprehensive financial planning tool used in the management of properties. It involves a detailed assessment of the property's physical components, such as roofs, HVAC systems, plumbing, roads, and common areas, to determine their condition, expected lifespan, and replacement costs.

𝐅𝐫𝐨𝐦 𝐦𝐲 𝐨𝐰𝐧 𝐞𝐱𝐩𝐞𝐫𝐢𝐞𝐧𝐜𝐞, 𝐈 𝐜𝐚𝐧 𝐭𝐞𝐥𝐥 𝐲𝐨𝐮 𝐭𝐡𝐚𝐭 𝐭𝐡𝐞𝐲 𝐚𝐫𝐞 𝐚𝐧 𝐢𝐧𝐯𝐚𝐥𝐮𝐚𝐛𝐥𝐞 𝐭𝐨𝐨𝐥 𝐢𝐧 𝐰𝐡𝐢𝐜𝐡 𝐭𝐨 𝐢𝐧𝐯𝐞𝐬𝐭. Their use demonstrates sound stewardship of your physical assets.

The primary purpose of a reserve study is to estimate the necessary funding required to cover future repair, replacement, and maintenance expenses over a specified time horizon, often 10-30 years. I found that 15 years was a reasonable planning timeline. By analyzing these financial needs, your organization can establish and maintain a reserve fund, ensuring that adequate funds are available when major repairs or replacements become necessary.

Each year, as a part of your annual budgeting process, you need to ensure that you have a line item for the cash that you will set aside to pay for replacement costs, repairs, etc. 𝐀 𝐫𝐞𝐬𝐞𝐫𝐯𝐞 𝐬𝐭𝐮𝐝𝐲 𝐰𝐢𝐥𝐥 𝐭𝐞𝐥𝐥 𝐲𝐨𝐮 𝐡𝐨𝐰 𝐦𝐮𝐜𝐡 𝐜𝐚𝐬𝐡 𝐲𝐨𝐮 𝐰𝐢𝐥𝐥 𝐧𝐞𝐞𝐝, 𝐟𝐨𝐫 𝐰𝐡𝐚𝐭, 𝐚𝐧𝐝 𝐰𝐡𝐞𝐧. Ideally, you are setting the cash aside a year ahead of time, to ensure you will have the cash on hand at the start of the year in which funds will be needed.

𝐓𝐡𝐢𝐬 𝐩𝐫𝐨𝐚𝐜𝐭𝐢𝐯𝐞 𝐚𝐩𝐩𝐫𝐨𝐚𝐜𝐡 𝐡𝐞𝐥𝐩𝐬 𝐩𝐫𝐞𝐯𝐞𝐧𝐭 𝐮𝐧𝐞𝐱𝐩𝐞𝐜𝐭𝐞𝐝 𝐟𝐢𝐧𝐚𝐧𝐜𝐢𝐚𝐥 𝐛𝐮𝐫𝐝𝐞𝐧𝐬 𝐚𝐧𝐝 𝐞𝐧𝐬𝐮𝐫𝐞𝐬 𝐭𝐡𝐞 𝐥𝐨𝐧𝐠-𝐭𝐞𝐫𝐦 𝐬𝐮𝐬𝐭𝐚𝐢𝐧𝐚𝐛𝐢𝐥𝐢𝐭𝐲 𝐨𝐟 𝐭𝐡𝐞 𝐩𝐫𝐨𝐩𝐞𝐫𝐭𝐲 𝐨𝐫 𝐟𝐚𝐜𝐢𝐥𝐢𝐭𝐲.

I highly suggest that your facilities reserve fund be held in a separate bank account, so that you are not tempted to raid it when general operating cash flow is a challenge.

It is recommended that you do not attempt to conduct the reserve study yourself. There are experts out there who can conduct one for you, but there will be a cost that it well worth the investment.

If your board has a facilities committee, the oversight of the reserve study process and management of the reserve funds can be one of its responsibilities. If you don’t have such a committee, then I suggest establishing a working group, comprised of board members, your CFO, and facilities manager to conduct it.