Part Two: Maintenance, copays, and debt service are not replacements
HOA Detective™ | September 1, 2026: Reserve studies conducted for homeowner associations (HOAs) are sometimes referred to as a capital reserve study, suggesting that only spending on capital assets is the subject of the study. Other times, the report is referred to as a replacement reserve study, suggesting that the study is a forecast of the spending related to replacement of commonly owned assets of the HOA.
Neither term is entirely correct nor entirely wrong. The reserve study conducted for a typical HOA includes both capital and non-capital spending, and “major maintenance and repair” expenditures. Some studies include insurance deductibles among the reserve spending forecast as if an insurance claim resulting in the payment of a copay is a foregone conclusion.
Some Boards use the reserve fund as a funnel to channel debt service costs when the Association borrows money from a bank. Some reserve study preparers conveniently include the annual update fees in the reserve funding budget to ensure that money is available to pay the consultant annual update services.
None of these practices are consistent with the Community Associations (CAI) Reserve Study Standards® (RSS®). Nor do they align with capital planning forecasts used by businesses and some institutional property owners.
What the CAI RSS® Say: The CAI Reserve Study Standards® do not identify insurance deductibles, loan payments, or debt service as reserve components, nor do they establish procedures for borrowing from reserve funds. If the industry is going to accept that CAI is the all-knowing arbiter of what is good for HOAs, we must accept the RSS® as the baseline for what a reserve study should contain in terms of the spending forecast. Case closed.
Non-Reserve Expenditures: Insurance deductibles are contingent risk exposures, while debt service is a financing obligation. Both should be evaluated in the association’s broader financial and risk-management planning, but neither should be presented as a conventional replacement-reserve component. Any temporary borrowing from reserves must be evaluated separately under applicable law and the governing documents, formally authorized, transparently reported, and supported by a defined repayment plan that does not impair the timely execution of scheduled reserve projects.
RSS® Reserve Study Definition: The CAI standards define a reserve study as a plan to fund “anticipated future major common area expenditures,” and define the funding plan as providing income to offset expenditures from the reserve fund. The reserve study is often presented to Board and HOA members as a list of future expenditures related to maintaining the common elements of the Association. That definition is too narrow.
A credible study is a decision-making tool. It identifies what the association must renew and replace. It is supposed to take into account present condition, replacement timing and cost, and translate those findings into an equitable funding path.
Routine, expected maintenance and capital replacement and renewal are two different things:
- One allows an existing asset to remain in service, perhaps extending the service life of the asset, perhaps not.
- The other replaces the asset, improves the value of the asset, or extends the service life of the asset.
The purpose of reserve studies is therefore to forecast the replacement reserve funding required to maintain the capital assets base of the Association.
Routine maintenance is recurring work that keeps a component operating and slows deterioration: cleaning roof drains, servicing an elevator, testing fire systems, changing filters, lubricating equipment, patching localized pavement, and making minor repairs. These are normally operating-budget expenses because they recur within the annual service cycle.
Capital replacement or major renewal addresses a long-lived component at or near the end of its useful life: replacing the roof membrane, resurfacing a large pavement installation, updating an elevator controller system while other components are left in service, recaulking a building enclosure, or replacing a central boiler are examples of capital replacement and major renewal. Hawaii’s statute captures the distinction neatly [1]:
- A capital expenditure purchases or replaces an asset with a life longer than one year;
- While “major maintenance” expenditure extends an asset’s life by more than one year.
The labels must follow the scope of work, not the invoice size. A costly annual janitorial contract remains an operating expense. A relatively small replacement of a discrete long-life common asset may be a reserve expense. The governing documents determine responsibility; accounting policy and the reserve study determine classification; the board applies both consistently.
Four Parts of a Credible Reserve Study: The four issues addressed by the credible reserve study are as follows:
- The component inventory. It should reflect the association’s actual maintenance obligations under the declaration, plats, and relevant statutes. It must not quietly omit an expensive component because the original developer’s budget did not mention it.
- Asset (component) condition. Remaining useful life is not simply original useful life minus age. Exposure, construction quality, maintenance history, climate, loading, prior repairs, and observed deterioration all change the forecast. California requires a reasonably competent visual inspection of accessible major components at least every three years for Associations subject to the state’s reserve study statutes. Washington generally requires its initial study, and an updated study at least every three years, to be based on a visual site inspection by a reserve study professional. [2]
- Component replacement cost: Quantities, present costs, inflation assumptions, project scope, access costs, design fees, permits, and appropriate contingencies should be visible enough to test. Maryland requires quantities or sizes, useful-life estimates, replacement costs, and an estimated annual reserve amount. [3]
- Reserve funding projection: The CAI RSS® refers to item 3 as the “financial analysis.” Items 1 and 2 comprise the “physical analysis.” Items 1, 2, and 3 are combined to develop item 4, the funding projection. The funding projection may be referred to as a funding “model” or “strategy,” depending on the provider.
The funding projection is the heart and soul of the reserve planning effort. It must be reconciled each year so it reflects the current reserve fund balance at the beginning of the year. Changes in future contributions, investment earnings, taxes on those earnings, inflation, and scheduled expenditures are also revised each time the study is updated.
RSS® Required Funding Disclosures: Under the RSS®, the reserve study should disclose whether the funding projection is based on one of four funding methodologies:
- Component funding,
- Cash flow,
- Baseline,
- Threshold.
If the study uses another funding method, the methodology must be described. If the funding plan results in a year-end funding balance of zero, the zero-fund balance must be disclosed in the narrative.
Some state statutes, like Washington’s, require that examples of funding projections be included in the study along with a recommended funding plan.
The Physical and Financial Analysis Must be Reconciled: When the Association starts spending the reserves, the actual expenditure activity must be reconciled with the financial assumptions and the component spending assumptions. Each annual update must take into account the following “reserve fund activity” machinations:
- Actual amounts dispersed,
- Rescheduling of future expenditures,
- Resetting of dynamic parameters such as ROI,
- Actual current year funding,
- Off-budget spending of reserves.
This process of annually revising the reserve study forecast is critical to the cash-flow model.
Validation of the Reserve Study: The term “validation” refers to the process of confirming reserve study assumptions by comparing the first set of assumptions to a second opinion rendered by an independent examiner. An opinion rendered by an objective, third-party expert, one disengaged from the long-term cash flow opportunities that result from double-dipping into the HOA’s financial “watering hole.”
In other words, a vendor not beholden to the Association for any reason except to provide a reserve study, or a second for purposes of validation of a previous study.
This validation should be performed by a professional who is independent of the developer, management company, major vendors, and contractors likely to receive the resulting work.
- After the collapse of Champlain Tower South in 2021, Florida now requires written disclosure of certain interests when a design professional or contractor involved with a structural integrity reserve study also intends to bid on recommended services.
- Hawaii requires disclosure of the preparer’s identity, qualifications, and potential conflicts. [4]
- Those are good national governance principles even where statutes are silent on the topic of reserve studies.
Annual Updates Result in a “Living” Plan: A 30-year reserve study becomes outdated after year one of the 30-year forecast. Each year brings actual expenditures, contribution variances, revised replacement costs, interest earnings, inflation, accelerated depreciation, unexpected repairs, and changes in component condition.
An annual update should replace previous estimates with actual, real-world data, roll the opening balance forward, record completed projects, revisit the next several years, and explain material variances.
- Oregon directs HOA boards to determine reserve requirements annually by conducting a study or reviewing and updating the existing one.
- California requires annual review of the study.
- Washington requires annual updates for covered associations, with a professional site-inspection update at least every three years.
- Virginia requires a study at least every five years and annual review of its results. [5]
- An HOA Board in a state with a longer statutory cycle should still treat annual updating as sound stewardship.
A Site Visit is not a Condition Assessment: A Reserve Specialist’s visual site visit is essential, but it is usually noninvasive and limited in scope. It can document visible distress, age, quantities, and apparent serviceability. It cannot reliably diagnose concealed corrosion, subsurface drainage, structural capacity, waterproofing failures behind finishes, firestopping defects, or the internal condition of piping and machinery.
When observed symptoms, building age, failure history, or project scale warrants it, the board needs an independent condition assessment by the appropriate architect, engineer, building-enclosure consultant, elevator consultant, or other specialist.
The provider’s findings should then feed back into the reserve study. Florida’s structural integrity regime expressly ties reserve planning to visual inspection and professional verification for specified buildings by licensed qualified experts, illustrating the difference between generic forecasting and safety-focused technical evaluation. [6]
Be Mindful of False Precision: A reserve study is a forecast, not a precision-based financial model. Component inventories with an exact replacement year and dollar amount may still carry a wide uncertainty range. Good studies state their inspection limits, including excluded components and key assumptions.
Good governance responds by commissioning targeted investigations before a high-risk project, obtaining current bids as the expenditure approaches, and establishing a contingency appropriate to the magnitude of the project. A study that is not reconciled to changing conditions of the subject property, and the Association’s current financial reality, is a forecast waiting to be validated.
Footnotes
1. Haw. Rev. Stat. § 514B-148(h).
2. Cal. Civ. Code § 5550(a); Wash. Rev. Code § 64.34.380(2)–(3) (effective until January 1, 2028), with transition provisions in chapter 64.90 RCW.
3. Md. Code Ann., Real Prop. § 11-109.4(a).
4. Fla. Stat. § 718.112(2)(g)3; Haw. Rev. Stat. § 514B-148(a)(6)(A).
5. Or. Rev. Stat. § 100.175(3); Cal. Civ. Code § 5550(a); Wash. Rev. Code § 64.34.380(3); Va. Code Ann. § 55.1-1965(B).
6. Fla. Stat. § 718.112(2)(g).
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