River Pines Reserve Plan
"Reserve
spending and balances are shown on this graph. Spending is
greater than the fund balance until we finish a 6 year project
involving the installation of additional trim boards on all
units. In 2011 this project will be completed and the fund
balance begins to build up again.
The reserve plan projects spending through 2034. During these
years we will spend $19 million replacing or improving our
existing facilities. Although we will be spending a
considerable sum of money the fund balance is still positive in
2034 with a balance of $912,000."
From Reserve Advisors, Inc.
How Is a Reserve Study Conducted?
A reserve study includes a physical analysis of the common property elements and a financial analysis of the reserve funding needed to cover future capital expenditures to repair or replace property elements.
Physical Analysis
The physical analysis includes a component inventory, condition assessment and life and valuation estimates.
To prepare a customized reserve study, a Reserve Advisors engineer conducts an information-gathering meeting at the property, with the property manager or a board member, or both. The meeting allows the engineer to secure important background on the property. It's also an opportunity for the property manager or board member to describe any problems the property is experiencing.
After the meeting, the engineer performs the property inspection to record, measure and assess the current condition of each common element. The engineer will pay special attention to problem areas.
As part of the physical analysis, the engineer takes photos to document the condition of the common elements. Based on the physical analysis of each element, the engineer estimates a remaining useful life and recommends when repairs or replacements need to be done.
Financial Analysis
Reserve Funding Methods
There are two industry-accepted methods for calculating a reserve funding plan - the Component (or straight-line) Method and the Cash Flow (or Pooling) Method. Both methods are approved by the Association of Professional Reserve Analysts and Community Associations Institute.
The component method divides the current replacement cost of each common element by the number of years before replacement (remaining life) to arrive at the necessary annual funding amount for each common element. The component method results in annual reserve budgets which vary from year to year. As such, the annual funding amount must be recalculated each year. Component method reserve funding also results in higher than necessary reserve balances.
The cash flow method pools all of the future replacement costs of the common elements and determines a funding plan that is designed to offset the collective (or pooled) future costs from the reserve fund. This method:
- utilizes reserve funds more efficiently
- provides a relatively stable level of reserve funding
- results in realistic and more reasonable reserve contributions
Reserves
What an owner should know about reserves video
The Michigan Condominium Act requires condominium associations to maintain "adequate reserves".
The most recent Reserve Study was completed by Building Reserves
There are 4 important reasons to conduct a reserve study.
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To maintain the property's value and appearance
A reserve study helps maintain the property's value and the property owner's investment. By identifying and budgeting for future capital improvements, the property's common elements continue to look attractive and well-kept, adding to the community's overall quality of life.
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To fulfill the board of directors' fiduciary
responsibility
Board members of community associations have a fiduciary responsibility to their members. Directors are legally bound to use sound business judgment in guiding the association and cannot ignore major capital expenditures or eliminate them from the budget.
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To establish sound financial planning and budget
direction
A comprehensive reserve study lays out a schedule of major repairs or replacements to common property elements and applies cost estimates to them. To ensure property owners have adequate reserve funding to cover anticipated costs, a reserve funding plan typically spans 30 years. In short, it's your blueprint for the future.
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To comply with state law
Many states now require community associations to disclose reserves, accumulate reserves or have professional reserve studies conducted. It's anticipated more states will adopt similar legislation.