One of the primary business
responsibilities of a Homeowner Association or Condominium Development
is maintaining and preserving property values of the Association’s
Common Element or Common Area which results in protecting the value
of the property of the owners that live there. To do this properly,
Associations must develop funding plans for future repair, maintenance
or replacement of Major Common Elements or Common Area components. A
Reserve Study is a budget planning tool that identifies the current
status of the reserve fund and establishes a stable and equitable
funding plan to offset the anticipated future Major Common Elements or
Common Area expenditures. The Reserve Study consists of two parts:
The physical analysis and the financial analysis.
There are many benefits to having a
Reserve Study done. First, it meets legal, fiduciary and professional
requirements. It provides for the planned replacement of major items
that must, at some point in time, be replaced, as major items
deteriorate during use. It minimizes the need for Special
Assessments. And lastly, a replacement fund enhances resale values.
Following are the things to keep in mind when planning your Reserve
Study.
1. All Reserve Study preparers are not
equal. There are a number of ways to evaluate the qualifications of
the person or firm, which you are going to retain to perform your
Reserve Study. Key factors when making your decision should include
the following: knowledge and experience of the provider, ability to
understand the client’s needs, local expertise and availability,
quality control and accountability, and professional education. It
would also benefit the Association to have its Reserve Study prepared
under the direction of someone who has received the Community
Association Institutes (CAI) Reserve Specialist (RS) designation and
the Association of Professional Reserve Analysts (APRA) Professional
Reserve Analysts designation. By obtaining these designations, the
individual has proven through a combination of education and
experience that they are qualified to perform a Reserve Study in
conformance with the National Reserve Study Standards of the Community
Association Institute and the Association of Professional Reserve
Analyst. Since a significant portion of the Reserve Study is based on
the condition of the individual components (such as roofs, siding and
the roads) included within the Reserve Study, someone with extensive
field evaluation experience should be responsible for the evaluation
of the components. A key to evaluating this qualification is to have
this portion of the work performed under the direction of a person
with an educational back ground such as, Construction, Construction
Management, or Engineering, as this education and experience confirms
this person has been skilled, trained and educated in performing this
type of work or evaluation.
At Reserve Funding by WSSC, with over
27 years of expertise in residential community management and 4
offices on the West Coast, we are able to provide both experience and
accessibility to meet all of our clients needs. All Reserve Studies
are performed under the direction of a Reserve Specialist (RS) and a
Professional Reserve Analyst (PRA). on staff who oversee and guide the
entire process.
2. All Reserve Studies are not equal.
Until just a few years ago, most Reserve Studies included a list of
all of the components, their replacement cost, and remaining useful
life in order to determine what the next years funding should be.
After many years of discussion and development by the Reserve Study
Committee of the Community Association Institute, it was agreed by the
leading providers from across the United States that all Reserve
Studies should include not only this “Financial Analysis” but also a
comprehensive: Physical Analysis.” This is now the standard. The
physical analysis is important because it determines the existing
condition and actual expected life of the Common Elements or Common
Areas. The financial analysis, which includes a cash flow projection
of the Reserve Fund over a 30-years period, is important because it
focuses on the planning and budgeting of replacing these Common
Elements or Common Areas based on the specific needs of the
Association. A Financial Analysis enables the Association to consider
long term planning decisions, rather than focusing only on the next
year’s replacement items. By providing this projection, the
Association is better able to make an informed decision in regards to
how much money should be set aside each year into the Reserve Fund and
still feel comfortable that a Special Assessment will not be required
over the life of the projection.
At Reserve Funding by WSSC, all
Reserve Studies are prepared in conformance with the National Reserve
Study Standards of the Community Association Institute and the
Association of Professional Analyst. Our financial model was prepared
with the help of licensed CPAs and Advanced Reserves Management, Inc.
3. Full Funding of a Reserve Study may
mean that you are over funded. Based upon the National Reserve Study
Standards of the Community Association Institute and the Standards of
the Association of Professional Reserve Analyst, there are a number
of different “Funding Goals” which are recommended for use as the
basis for your Association’s future reserve fund planning. “Baseline
Funding” is when the cash flow projection reaches $0 at some time over
the projection period “Component Full Funding” is based on keeping
every individual component within the Reserve Study 100% funded. In
most instances, this will result in a significant amount of funds,
which are never used during the cash flow projection period.
“Threshold Funding” is when the amount in the fund during the cash
flow projection period is based upon keeping a minimum balance within
the fund. This is generally more than “Baseline Funding” and less
than Full Funding”. “Statutory Funding is based upon the
establishment of the amount as dictated by the local State
requirements, and finally, the most accurate method is called “Pooling
Method. With Time Value of Money” with weighted average life (entering
a specific contribution amount is also an available feature). First,
the following data is accumulated for each real or personal item in
the analysis: the date placed in service, the cost, and when
maintenance or replacement is scheduled as of the analysis date.
Based on this data the: Weighted Average Life” of all the items, the
“portfolio” is calculated. This calculation considers the cost
(weight) of the individual items and how many years and months (life)
until long-term maintenance or replacement of the portfolio items will
take place. This calculation can be made by using either the current
cost or future cost of the reserve items, hence the current cost or
future cost methods for calculating the Weighted Average Life (WAL).
The clients also have the option of including inflation, yield on
investments, loans/special assessments and deferred expenditures.
Once all the data has been entered into the system and the financial
options determined, the Client will be able to review the profile of
the “reserves.” Reserve being funds accumulated and the items
requiring long-term maintenance or replacement, and when the two are
properly correlated into an overall physical and financial plan,
projected funds would be available when needed. This is determined by
the beginning balance of the reserve funds, the timing and materiality
of scheduled expenditures and the Weighted Average Life of the
portfolio as reflected in the cash flows. The reserve study provider
will be able to arrive at the optimum solution by utilizing the
reserve profile adjustment factor, hence producing the most accurate
and customized resource management report possible.
At Reserve Funding by WSSC, we work
with the client to establish the funding goal ahead of time and then
concentrate on strategies to achieve that objective. We also present
detailed projections so the client can immediately see the results of
continuing the funding suggested and the 30-years financial plan.
4. The Replacement Costs included
within a Reserve Study may consider replacement alternatives, not just
replacement with the exact same component or system. In many
instances the original component, which is being replaced, either is
no longer available or has become outdated since it was first
installed. By making recommendations for alternatives to the initial
installation, the Client may be able to install a replacement
component or system with a significantly longer life, such as a new
type roof, siding, or a component or system which is much more energy
efficient such as a new HVAC system. In both cases, this will result
in either a reduction in recommended contributions to the Reserve Fund
or a reduction in the Client’s energy costs.
At Reserve Funding by WSSC, all
Reserve Studies are prepared under the direction of a designated
Reserve Specialist and Professional Reserve Analyst and a licensed
Engineer for costs and life cycles whose expertise are invaluable to
the Client.
5. The Reserve Study can be used for
much more than just estimating the Association’s contributions to the
Reserve Fund. The Reserve Study cash flow analysis can also be used
as a tool for determining how the Association’s Reserve Funds can be
invested. They give the Association the ability to plan for the
actual replacements, therefore making it easier to negotiate more
effectively with contractors. The cash flow analysis will show how
much money will be in the Reserve Fund and over what period of time.
By reviewing this information with the Association’s investment
advisor, an investment plan can be established to maximize the return
on these funds based upon when they will be needed. In addition, by
reviewing the anticipated replacements in the coming year on a regular
basis, the Association can plan to have the required work performed
before the actual conditions deteriorate to the point that remedial
work will be required as part of the replacement, which can cause a
significant increase in the actual cost of doing the work. A common
example of this occurs with pavement seal coating and overlays. If
the application of seal coating is not performed on the recommended
schedule, even if the pavement looks good, it can result in additional
deterioration of the pavement which must be corrected prior to the
application of the seal coating or overlay. This can reduce the
anticipated time period before the overlay is needed, but also
increase the cost of the work when it is done.
At Reserve Funding by WSSC, our
expertise in both the analysis of existing conditions and the ability
to answer technical questions specifically related to the conditions
at your site or provide someone who can prevent this from occurring.
6. The Reserve Study will not be the
only funding the Association will need for the upkeep of the Common
Elements or Common Area. The Reserve Study is only for the major
repair or replacement of the Common Elements, Limited Common Elements,
Common Areas or Limited Common Areas that are the Association’s
responsibility. A reserve fund is intended to cover non-annual
maintenance, repair and replacement costs. In all cases the cost of
ongoing (annual) maintenance should also be budgeted for separately,
as this is not included within the Reserve Study. If the proper
maintenance is not performed, it can result in a significant loss of
useful life of the reserve component. This will result in their
replacement occurring sooner than anticipated when adequate funds have
not yet been accumulated.
At Reserve Funding by WSSC, we can
also provide the Association with a recommended annual maintenance
schedule and budget (Not include in the cost to prepare the Reserve
Study) to help prevent this situation from occurring. Of course, any
such maintenance plan is ultimately dependant on effective
implementation and management.
7. The Reserve Study is a budgeting
tool. The actual cost of performing the replacement work when it
occurs may vary from the costs included within the Reserve Study. In
preparing the Reserve Study, the replacement costs which are used are
based upon both industry estimating standards as well as the actual
cost of similar projects which have been performed. The replacement
costs are typically based upon current dollars and are not based upon
the preparation of specifications and bidding of the work to actual
contractors. It is intended to be used as a budget-planning tool.
Actual costs at the time work is done are influenced by many variables
such as, but not limited to, material prices, contractor workload,
weather, location, etc. In order to keep the replacement costs as
well as the anticipated useful life current, the Reserve Study should
be updated (including a site visit) on a regular basis.
At Reserve Funding by WSSC, we
recognize the statutes under which each Association is regulated and
will make an annual off-site update of each Reserve Study and an
on-site visit every three years.
