Condo Media - July 2021 - 20

RESERVE STUDIES AND FUNDING STRATEGIES
Meanwhile, the Foundation's latest
U.S. national data shows that annually,
$27.4 billion in assessments are funneled
into reserve funds for the repair,
replacement, and enhancement of common
property, as well as to meet new environmental
standards and implement
new energy-savings.
Reserve studies consist of physical
and fi nancial analysis. Since communities
come in all shapes, sizes, and
vintages, a critical and often contentious
decision is which components to include.
That's typically done by looking at
governing documents, applying National
Standards, and considering state statutes
and civil codes that may apply.
Asset lists are different for every association
and getting board members and
managers to agree on what to include
can be a challenge. " We have an asset
list for one association in Las Vegas that
has more than 2,000 items and a few of
them here in New England might have
only 100, " Mooney notes.
Modern reports typically include
an executive summary, expenditure
forecast, funding plan, and detailed
narratives with component history and
photographs documenting their condition,
as well as Excel spreadsheets of
expenditures and funding plans.
Reserve studies assess the condition
of each component and estimate its
remaining life and expected replacement
cost. The heart of a reserve study
is the expected useful life (EUL) and
remaining useful life (RUL) of each
asset. For example, if a roof will need
to be replaced in 20 years and would
cost $100,000 to replace today, the
study might recommend that the association
set aside $5,000 a year for
20 years. However, the fi nal projected
contribution will need to be adjusted
for infl ation and interest accrued on
the reserve fund balance.
Monthly or annual homeowner dues
cover general maintenance and operation
of the community and should include
contributions to a reserve fund.
A board can use the recommended
contributions from the study as a
guide to adjust the association dues
accordingly. If their reserve fund is underfunded
based on the study analysis,
the board may raise the dues " and the
study provides justifi cation for doing
so, " Lockhart says, adding that these
increases sometimes can be phased
out over a number of years " to make
the increases more manageable. "
Reserve studies shouldn't be set
aside until budget season but shared
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RESERVE FUNDING TERMS are complicated and can be confusing.
There are two major methods of developing a reserve funding plan:
Cash fl ow method (also known as " pooling " ):
Contributions to the reserve fund are designed to offset the variable
annual expenditures from the fund. Mooney says the approach is
currently the most popular. " The goal is to have enough money
when you need it with, perhaps, a bit of a cushion, " Mooney says.
Component method (also referred to as " straight line " ):
Each item on your component inventory has its own account, so the
yearly funding over time covers the total cost of replacement. In other
words, you take the total cost of the component (less any existing
reserve amount) and divide it by the remaining life of the component.
20 CONDOMEDIA July 2021
When it comes to setting funding
goals, there are a number of options:
 Baseline funding
The reserve cash balance
is kept above zero.
 Threshold funding
The balance is maintained above a specifi ed
dollar or percent funded amount.
 Full funded
The actual (or projected) reserve balance
is equal to the fully-funded balance.
when completed. Lockhart recommends
that owners and prospective
buyers be given the executive summary,
which includes the current
fi nancial status and annual funding
recommendations, while management
and board members should
get the entire report.
Fees charged for conducting
reserve studies are typically based
on the size, age, and number of
components, as well as the amount
of time the engineer will spend
conducting the study.
TRENDS YOU MAY BE SEEING
Updating reserve studies every three
to fi ve years is critical and typically
done by the study provider. Lockhart
says one positive trend is more communities
are making updates themselves.
With a professional reserve
study, some providers now include
the Excel spreadsheet version of the
expenditure table and funding plan
complete with formulas that allow
the board or manager to update the
study " to refl ect the current state
of the community " Lockhart says.
By updating numbers as projects
are completed, they can
quickly see how changes
Condo Media - July 2021

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