In the archives of sound financial advice, saving for a rainy day is a titan, right up there with never bet your last dollar on a horse race, or any other sage old saying. For the good health of any organization, having enough cash in reserve to handle just about any and all problems is imperative. Knowing how much you will need for that rainy day provides even better protection.

That's where reserve studies come into the picture. In the most basic terms, these studies let boards and associations know when elements common to an entire co-op or condo community must be repaired and replaced, and provides an estimate of how much that work will cost. It also includes a plan for how to pay for those repairs by giving an estimate of how many dollars need to be set aside each year to meet pre-determined levels of funding. The money that is put aside is called a reserve fund.

"Reserve studies provide associations with a tool they can use to plan for the future," says Nancy Hastings of MAMCO Property Management in Mt. Laurel. "Getting a reserve study done forces boards and management to take a detailed look [at the future] so there aren't any surprises and no need for special assessments."

The Nuts and Bolts

There are two types of reserve studies: initial and update. As the name suggests, an initial study is the first study done and these days, is most often performed before a community is even built. Update studies are usually done every three years or so after the initial study is completed.

The first step in getting an initial reserve study done is for the association to solicit proposals or quotes from reserve study professionals. At this point, "It's important to make sure the request for proposals accurately reflects what the board or association is looking for," says Mitch Frumkin, reserve specialist and president of Kipcon, an engineering consultant in North Brunswick. "It's important to ensure that the study is in compliance with both national reserve study standards and any statutory requirements."

Choosing the company to carry out the full study is an important decision, Frumkin says, and should not always be determined by who has made the lowest bid. "Boards are very much cost-driven," Frumkin says. "And a common mistake they make is to tend toward the least expensive choice. Most reserve studies, however, fall within a very narrow range of cost." Which means that savings likely will not be that huge either way, while saving a few pennies might cost the association significantly in the long run if the study is not done properly.

"Management needs to make sure they look into a company's background to see how they've performed," says Frumkin. "They should also look at sample studies to see the quality of work."

To ensure peace of mind, it is also important to determine that the individual preparing the reserve study is in fact a Reserve Study Specialist. Creating an accurate reserve study requires an understanding of engineering, contracting and finance. An engineer might not be able to provide the best fiscal advice, while an accountant might not be able to tell you how long the leaky roof over the pool house could hold out. Individuals who have earned reserve specialist status should have the proper training necessary to bring all of those skills into play when it comes time to creating a deep, detailed reserve study.

The Study Itself

As with any such undertaking, the key to a good reserve study lies in the details. When an initial study is launched, the reserve specialist will request a set of governing documents to determine which common elements the community is responsible for. Reserve studies only assess potential repair and restoration costs for common elements that are the association's responsibility. The governing documents are key to determining which areas constitute common elements and which may constitute limited common elements. In some cases, that can become a gray area —balconies in a high-rise community, for example. Sometimes maintenance of those balconies can be the responsibility of the unit owners. In other cases, it's up to the association to keep them in good repair. "That's why you have to look at the governing documents," Frumkin says.

Reserve specialists also will ask to see architectural drawings and engineering documents. They then will go into the field and inspect the site itself. There, they can see the condition of each element to determine how much life it has left and also ensure that what they see on the architectural drawings matches up with what was really built, since changes are often made during the construction process.

The specialists will then take the gathered information and put together a detailed, 30-year proposed repair schedule. This summary will tackle everything from pavement seal coating, landscaping and aluminum downspouts to shingles, decks and doors. Once a draft of the schedule is completed, the board will review it and comment before a final report and funding plan are created.

The funding plan comes together by taking the cost of each item that will need to be repaired or replaced and then determining how much money needs to be set aside each year to cover those costs.

There are three different types of funding plans available, says Hastings. The first, called full funding, means that the board's goal for their reserve fund is a 100 percent balance at all times.

The second type of funding, called threshold funding, creates a pre-determined balance that the board agrees to reach and maintain. That balance is a percentage of the total cost. "For example, think of the most expensive thing you'll have to replace in any given year," says Frumkin. "Maybe it's a $100,000 boiler. You want to make sure you always have enough funds available to pay for that boiler. For each association, though, the threshold will be different."

The final funding option, called baseline, simply means keeping your reserve fund above a zero balance. "Needless to say, that's not a plan we recommend," Frumkin says.

Staying Ahead of the Game

With a solid reserve study in hand, associations can better plan for the future. That future, however, should also include regular reserve study updates. "It's very difficult to do a study and have it be good for 30 years," Hastings says. While it will cost perhaps a thousand dollars or more to get an update done, it may also end up saving money and aggravation later. "You may be able to save money if something is not degrading as fast as initially estimated." If a roof is lasting longer than expected, the cost of repairing it may get adjusted or pushed back on the calendar.

"Conversely, really bad winters may have worsened concrete walkways, meaning they need to be repaired sooner," Hastings adds. Knowing that ahead of time means avoiding costly and unpopular special assessments later.

As buildings get older, Frumkin recommends doing updates even more frequently, perhaps every other year.

To make the most out of a reserve study, it's important to have managers to help the board actually execute the plan. "It's really important to have someone who understands the study," Frumkin says. "You need a manager who can look at the plan and see that the roof needs to be done next year. That person needs to say, 'Let's start planning.'"

And as painful as it is to spend money on repairs and updates, especially if it looks like it can be put off just a little longer, it's imperative to follow the plan. "The reserve study is a budgeting and planning tool," Frumkin says. "A manager should look at it every year at the beginning of the budget cycle and spend the money that needs to be spent and make the repairs that need to be made. The longer people wait, the more expensive things will be."

Better Safe than Sorry

To get an initial reserve study done can cost an association anywhere between $3,000 and $5,000, depending on the size of the property. That cost is a small one, however, when it's factored against the power of knowing what's to come. Being able to plan, budget and protect residents from the financial pain of unexpected assessments is what responsible management is all about. And it's sure to keep homeowners happy, too.

Liz Lent is a freelance writer and frequent contributor to The New Jersey Cooperator.