RESERVE STUDY

Condominium board members strategizing the reserve fund
"If we moved these projects ahead two years, then we could..."
Overview
Whatever funding strategy a reserve study selects, it should recognize the fact that a reserve fund is the primary resource for preserving the value of of the common and individual investments in a condominium/HOA property. Clearly, capital assets depreciate with time. If that amount of depreciation is not matched by reserve capital,then there is an imbalance. If the depreciation presents itself as visible deferred maintenance then the imbalance translates to reduced perceived market value of all investments. A condo reserve study,then, is all about value. It will define the size of the resource/reserve you need at any given time to preserve the value of your investment.




What size resource? How much should be in your reserve fund? 










The writers would no doubt agree that one model will not fit all associations across the condominium/HOA landscape since:





A Reserve Study responds to Specific Needs

What has evolved, in practice, and in response to the specific needs of individual associations, is essentially customized interpretations of the term “fully funded”:






Each interpretation will contribute to reserves such that funds are available at the time needed to capitalize replacement of all commonly held assets.


Shortfall Options

These strategies assume there is a fairly healthy starting balance in the reserve fund to begin with. What happens if that is not the case? What if the Analysis of Present Funds of the reserve study finds the fund in significant shortfall? The options are brief:





Whatever strategy is chosen, the starting point should be a capital reserve fund study done by a recognized professional..



Pulling it all together - the Asset Management Plan
A good place to start to answer that question is with Best Practices - Reserve Studies/Management published by the Foundation for Community Association Research of the Community Associations Institute. The model there advocates a reserve position termed “fully funded”. That means, for example, that if a roofing project to be done ten years from now will cost $100,000,then you should be contributing $10,000 annually to the reserve fund to be able pay for it ten years hence. As a national model, the position is a sound and logically agreeable departure point. It certainly subscribes to our concept of replacing depreciating assets with contributions to reserve.
This approach (which more associations appear to be using) combines the regular maintenance of the common area components with the funding strategy of the reserve study. It has benefits on several levels. The main one is that the running record of performance of an asset as it responds to maintenance is the best possible input to creating an accurate predictive model for its replacement. In short, your reserve funding strategy can be continuously updated and closely targeted. That can be a nice advantage at budget time.  
Asset Management Plans are best constructed and managed by clients and/or property managers since they are clearly involved with the day-to-day operations. The firm that provides the capital reserve study can, however, collaborate in the initial setting up of the plan.

  Funding Strategies
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          PO Box 395  Rye Beach, NH  03871
   603.964.5551  info@burnsengneers.com  
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