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Reserve Planning |
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Reserve Planning is accomplish via a "Reserve Study" which identifies association maintained components, their useful lives, their costs of repair or replacement and a 30 year funding plan. The Reserve Study ensures that all owners pay a fair share, that money is there when needed and no more special assessments! Below is a Q&A about this subject. For more information,
Reserve Study Q&A What is a reserve study and how can it help a homeowner association better manage its funds and maintenance? The reserve study analyzes major repair and replacement needs like roofing and painting and provides a funding plan for accumulating money to perform this work when its needed. There are several parts to the reserve study: First, all major association maintained components are identified. (Click here for a Reserve Study Component List). Next, the cost to renovate each item is then determined by contractor bid or construction cost estimate. Then, the remaining useful life (in years) of each item is established. These items are plugged into a mathematical formula: Cost ÷ Remaining Useful Life = Money Needed Yearly for Reserve Fund For example, if roof replacement costs $100,000 and the remaining useful life is 25 years, then $4,000 is required yearly to pay for the work when it’s needed. Doing this procedure for each component will show the total money needed yearly to fund reserves. Each year, the reserve fund needs to be adjusted by area inflation and the interest earned on the invested reserve funds. How should these reserve funds be accounted for? Reserve funds should be kept in a different account from the normal operating funds. Rather than lumping the money into an account like "General Reserves", it should be allocated according to the reserve plan between the different categories (like painting and roofing, etc.). It’s conceivable that reserves will grow to tens or hundreds of thousands of dollars. Prudent investing of these funds will reduce the amount of money needed from owners. Since the reserve study shows when money will be needed, long term investments can be purchased that will return more than savings accounts. Conservative investments like government securities or certificates of deposit (CDs) are recommended, however, there are other conservative options so consult with your financial advisor. When should a reserve study be performed? All homeowner associations, regardless of size, should have a reserve study done. Once completed and the funding plan is in place, yearly updates are relatively simple and inexpensive. If the association has inadequate reserve funds to begin with, the reserve study will show the need for "catch up". To replenish the fund, several options are available: 1) a special assessment (lump sum cash contribution from owners), or 2) a phase-in period of several years where fees increase each year, or 3) a combination of both. Whatever course of action taken, the goal should be to reach "100% Funding" which means the association is accumulating money on schedule to meet future major maintenance needs. What sorts of financial problems can homeowner associations encounter with inadequate reserve funds? Without adequate reserves, associations rely on special assessments. Special assessments are unfair because owners that have bought and sold in the past fail to pay their fair share and current owners end up "holding the bag". Special assessments are a hardship on owners and some may be uncollectible if an owner’s equity and assets are small. Also, since special assessments are unpopular, the tendency is to postpone major renovations. This deferral accelerates the deterioration process, detracts from curb appeal and erodes home resale values. A reserve funding plan with regular monthly contributions from each owner is both fair and insures that major maintenance is done when it’s needed. Rarely will special assessments be necessary. Can poorly managed reserve funds affect the sale of units? Absolutely. Buyers and lenders look closely at how reserve funds are handled by the association. Lack of reserves is a red flag for an inevitable special assessment, a sign of poor planning. If given the choice between an association with healthy reserves or one with little or none, which would be the wiser investment? Which types of major repairs must be paid for by association funds? The association documents define what repairs are the association’s responsibility. In common wall communities like condominiums, the association is usually responsible for items like roofing, landscaping, siding, painting, paving, sidewalks, pools, clubhouses, signage and fencing. But there are many more. What kind of qualifications should a reserve study analyst have? Besides experience doing reserve studies and a list of client references, the reserve study analyst should have good budgeting skills, knowledge of construction and an understanding of homeowner association operations. How much does a reserve study cost? If the association has a volunteer experienced in construction cost estimating, the cost is nothing. However, there are clear advantages to having a knowledgeable PRA-Professional Reserve Analyst to perform the work. PRAs have the expertise, knowledge of local contractors and costs and no conflict of interest. Costs to perform a reserve study vary based on the size of the community, the number of components and the time needed to measure them. The initial reserve study is the most costly since it involves the most time to gather the component data. Recommended annual updates are much easier and less costly since they only involve changing the inflation factor, interest yield and updating any components that have actually had work done since the last reserve study. Regenesis performs
Reserve Studies in Oregon and SW Washington. For a no cost, no obligation
proposal, call 503.977.7974 or Email Us.} |
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