Explaining a Reserve Study — A Useful Concept, But Not One-Size-Fits-All
A Reserve Study uses reserve funding is a method of planning and budgeting for future building costs. It involves estimating the useful life of key components and their replacement cost and setting aside money each year so that when the time comes, the funds are available.
It's a bit like applying a depreciation model. For example, if a roof has a 30-year life and is already 10 years old, then roughly a third of its replacement cost should already be in the reserve fund.
The theory requires the owners to contribute an amount each year, in proportion to the component's wear and tear, so no one gets stuck with a large cost later on.
Using the same roof example, if a $120,000 roof is 10 years into a 30-year life, the study might suggest the owners should already have $40,000 in the fund to provide for the roof and contribute $6,000 a year to reach the fully funded target by year 30.
In practice, reserve studies involve three main steps:
Determine the age of each asset (like roofs, cladding, or lifts)
Estimate its total useful life: How long before it will likely need replacing
Calculate the replacement cost, and divide that by the remaining life to work out how much should be saved each year
Where Reserve Funding Works Well
This kind of structured reserve funding can make sense in some sectors, for example, institutional property owners such as universities, listed property companies and publicly owned properties (e.g., hospitals, ports, airports, government campuses)
But it makes even more sense for organisations where property is just one part of a diverse asset base, such as electricity network operators (e.g. Transpower or Vector), telecos (Spark and One NZ), ports and airports and transport operators with large fleets or infrastructure (e.g. shipping companies)
For example, Transpower owns thousands of high-voltage pylons. Each has a known specification and performance history, and a relatively predictable end-of-life profile. The company can estimate the cost of replacing them, build a funding model accordingly, and recover the cost over time by including it in their charges to consumers. i.e. They are using the model to justify and leverage higher fees. It helps maintain cash reserves with no cost to the company.
In other examples, Spark manages hundreds of cell towers, and Tauranga Port maintains wharves. Both could build funds for major works in advance through systematic, reserve-style accounting. The shareholders might otherwise see big cash surpluses that they want paid out as dividends. The system helps retain cash in the business and keeps it solvent.
But Private Property Owners Are Different
The situation is very different for a unit owner in a body corporate. They can’t pass costs on to someone else and have to pay the body corporate their own, tax-paid income to build up the body corporate's reserves.
Also, the average unit owner often owns the unit for a short period (on average, eight years in New Zealand), and unlike companies, they have little interest in funding expenses 30 years in advance.
In most cases, the theory of reserve funding doesn't match the reality of private property ownership. Still, understanding the principle and when it does or doesn't apply may help the more involved committee members make better decisions about how to approach long-term maintenance planning.
An Academic Approach to an Academic Problem
Reserve funding models often originate from academic or institutional thinking, grounded in accounting theory, asset management principles and lifecycle costing. On that basis, the approach may be better suited when the property owners themselves or those evaluating the assets are graduates of similar academic programmes, because for professional asset managers, quantity surveyors, infrastructure accountants, and even bankers, the logic of reserve funding is familiar and expected.
But for everyday owners who are mostly laypeople, the approach can feel unnecessarily theoretical, difficult to understand and therefore support, and what might seem like prudent forecasting to an analyst can feel like over-engineered guesswork to someone with lived experience and common sense.
A Reserve Study is a useful model. But like all models, it needs to be used in context.
Ends. Updated 20 April 2025 JB
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The Plan Heaven team.
Disclaimer. Plan Heaven is not qualified in law and any comments made on this website are only the opinion of Plan Heaven and should not be regarded as legal advice. Our comments are merely providing some thoughts on how the legislation might be interpreted and how we go about attempting to meet its requirements. You should not rely on this information in isolation and do you own homework and at all times if you wish to be sure of your position relating to legal matters you should seek advice from a suitably qualified lawyer.