FAQ's
Why is it important to perform a Reserve
Study?
The reserve allocation makes up a significant portion
of the total monthly dues. A Reserve Study provides the essential
information that is needed to guide the Board of Directors in establishing
the budgetary decisions for running the future and daily operations
of their community.
It is suggested that a third party professionally
prepares a Reserve Study since there is no vested interest in the
property. Also, a professional knows what to look for and how to
properly develop an accurate and reliable component list.
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Is it the law to have a Reserve Study
conducted?
The government requires reserve studies in approximately
20 states. Even if it is not currently governed by your state, the
chances are very good that the documents of the association require
the association to have a reserve fund established. This does not
mean a Reserve Study is required, however it is hard to know if
there are enough funds in the reserve account if you don’t
have the proper information.
Some associations look at the reserve fund and think
$50,000 is a lot of money and they are in good shape. What they
don’t know is that the roof is going to need to be replaced
within 5 years, and the cost of the roof is going to exceed $75,000.
So while $50,000 sounds like a lot of money, in reality it won’t
even cover the cost of a roof, let alone all the other components
the association is responsible to maintain.
Many states have passed laws that require
associations to have a Reserve Study completed to keep homeowners
away from having to pay for special assessment costs.
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After we have a Complex Solutions Reserve
Study completed, what do we do with it?
Our intention with the customized format of our
reports is to make it easy to read and understand. Hopefully, you
will not look at this report and think it is too cumbersome to understand.
First, take the time to review the report carefully.
Make sure the component information is complete and accurate. If
there are any inaccuracies, please inform us immediately so we may
revise the report.
Once you feel the report is an accurate tool to
work from, use it to help establish your budget for the upcoming
fiscal year. The reserve allocation makes up a large portion of
the total monthly dues. This report should help determine the correct
amount of money to go into the reserve fund. Additionally, the Reserve
Study should act as a guide to obtain proposals in advance of pending
projects. This will give you an opportunity to shop around for the
best price available.
The Reserve Study should be readily available for
real estate agents, brokerage firms, and lending institutions for
potential future homeowners. As the importance of reserves becomes
more of a household term, people are requesting homeowners associations
to reveal the strength of the Reserve fund prior to purchasing a
condominium or townhouse.
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How often do we update or review the
Reserve Study?
Unfortunately, there is a misconception that these
reports are good for an extended period of time since the report
has projections for the next 30 years. Just like any major line
item in the budget, the Reserve Study should be reviewed each year
before the budget is established. Invariably, some assumptions have
to be made during the compilation of this analysis. Anticipated
events may not materialize and unpredictable circumstances may occur.
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What makes an asset a “Reserve
Component” item versus an “Operating Component”
item?
A “Reserve Component” is an item that
is the responsibility of the association to maintain, has a limited
useful life, predictable remaining useful life expectancies, typically
occurs on a cyclical basis that exceeds 1 year, and costs above
a minimum threshold cost.
An “Operating Component” expense is
typically a fixed expense that occurs on an annual basis. (this
is a wrong statement Maybe ) For instance, minor repairs to a roof
for damage caused by high winds or other weather elements would
be considered an “operating” expense. However, if the
entire roof needs to be replaced because it has reached the end
of its life expectancy, then the replacement would be considered
a reserve expense.
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The GREY area of “maintenance”
items that are often seen in a Reserve Study
One of the most popular questions revolves
around major “maintenance” items, such as painting the
buildings or seal coating the asphalt. Some accountants say reserve
components such as painting walls or seal coating asphalt cannot
be considered a reserve issue because replacement of a “capital”
item is not in occurrence. However, it is the opinion of several
major Reserve Study providers that these items are considered to
be major expenses that occur on a cyclical basis. Therefore, it
makes it very difficult to ignore a major expense that meets the
criteria to be considered a reserve component. Once explained in
this context, many accountants tend to agree and will include any
expenses, such as these examples, as a reserve component.
Maybe give more examples and include something
about the components that have an extended useful life and no reserve
funding is allocated to those components.
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The Property Inspection
The property inspection is conducted following a
review of the documents that are established by the developer identifying
all common area assets. Maybe include a list of the necessary documents.
In some cases, the association may revise the documents. Common
area components may also be reported by the client, or by other
parties that have prior knowledge of common area components.
Estimated life expectancies and life cycles of common
area components are based on conditions that were readily accessible
and visible at the time of the inspection. Destroying landscape
work or walls, or performing any method of intrusive investigation
will not be part of the property inspection. In these cases, information
may be obtained by contacting the contractor or vendor that has
worked on the property for any component in question.
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The Reserve Fund Analysis
The starting balance for the reserve fund analysis
can be calculated by adding any expected reserve contributions and
subtracting any pending projects for the rest of the year. This
number is compared to the ideal reserve balance and arrived at the
percent funded level. The percent that an association is funded
measures how strong the reserve fund is at that point in time.
Measurements of percent funded strength:
0% - 30% Funded – Is considered
to be a “weak” financial position. Associations that
fall into this category are subject to special assessments and deferred
maintenance. This situation could lead to lower property values.
If the association is in this position, actions should be taken
to improve the financial strength of the reserve fund.
31% - 69% Funded – Majority
of associations are considered to be in this “fair”
financial position. While this doesn’t represent financial
strength and stability, the likelihood of special assessments and
deferred maintenance is
diminished. Effort should be taken to continue strengthening the
financial position
of the reserve fund.
70% - 99% Funded – This indicates
a financial strength of the reserve fund and every attempt to maintain
this level should be a goal of the association.
100% Funded – This
is the ideal amount of reserve funding. This means that the association
has the exact amount of funds in the reserve account that should
be at any given time.
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