Finance Advisory Committee – June 2022

By Robert “Bob” O. Jester
Finance Advisory Committee Chair

As published in The View, June 2022:

Question of the Month: What Is a Reserve Study, and Why Does the Association Have to Perform One?

A Reserve Study identifies major components of the facilities owned by an Association such as air conditioners, etc., that have a remaining service life of 30 years or less. The Davis-Stirling Act, which is the California law that regulates Homeowner Associations, requires an Association to perform Reserve Studies at least once every three years. The study is to be a report based on a diligent visual inspection of the accessible areas of Association components which the Association is financially responsible for maintenance, repair, and replacement. (See CA Civil Code sec. 5550.)

In addition to identifying the components, the study estimates the cost of maintaining or replacing the major components and provides a funding plan to meet these Association needs through the residents’ annual monthly contributions. The studies are also reviewed annually by the Association to determine whether events over the past year warrant adjustments to the reserve funding. The Reserve Study and the accumulation of the required reserve funds is designed to prevent the necessity of special assessments and/or loans to cover Association’s needs.

If the reserve funds are properly accumulated annually, the residents should feel that their investment in a community is jeopardized by special assessments or Association debt obligations. The latest Reserve Study conducted by SCT Reserve Consultations, Inc., confirmed that -- out of our current monthly assessment of $309.00 -- $51.23 is allocated to our reserves. It also indicated that the reserve amount that we presently have in our replacement fund is 77.37% of suggested total funding. Learned opinions have determined that this is excellent because it presents only a 1% or less chance that we would suffer a special assessment or loan.

As a resident-owner, you receive the Reserve Study Summary with your annual budget report; and you have the right to request an opportunity to review the entire Reserve Study.

The Finance Advisory Committee (FAC) assists in the selection of a competent reserve study consultant and makes that recommendation to the Board for approval. The FAC will also review the report regularly throughout the year, and the FAC has a voice in all proposed replacement fund expenditures in excess of $5,000 from the reserve funds. We at the FAC take this obligation in our Charter very seriously, as we continually work to keep our community financially healthy.

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