How Far Into The Future Should Your HOA Reserve Study Cover?

Do you know the last time your HOA did a reserve study?  Maybe the homeowners association is new and the reserves need to be financed, or the HOA has been around a long time and an update is all that’s needed.  Without a neighborhood website, you might be wondering how many years the reserve study should cover.

First, the size and age of the homeowners association should be considered, as well as the value of the capital assets.  Then, ensure that the expenses you include should actually be listed on the reserves.  Keep in mind that reserve funds are meant for the repair, replacement, and maintenance of capital assets.

 

If your HOA is small, assets such as simple playground tools are likely only good up to 10 years.  In that case, the reserve study should last around ten years.  On the other hand, if the HOA is large, there will be more complex items with a longer useful life of up to 20 or 30 years.  This means the reserve study should cover a longer time up to 30 years and complex items usually cost more.

 

Obviously, your HOA should own the item, and privately owned assets like swimming pools or other structures belonging to homeowners are not eligible.  Also, assets need to have a limited useful life that is predictable, for instance, an HOA van may have a limited life of 25 years.

The replacement costs of the capital asset that you intend to include in the reserve study should be above a minimum, like over 0.5% of the annual budget.  The operating budget should cover any replacement cost that is below the pre-defined minimum.  Consider using the neighborhood website to explain the reserve fund to homeowners so they don’t wonder why the HOA is setting aside such a large sum of money!