1) What are reserves?
Reserves
provide the funding necessary to maintain, repair, replace or restore major common area
components (such as paint, pavement and roofs) in the future. Ideally, all future reserve item expenditures will
be covered by those funds currently set aside in segregated accounts as reserves.
2) What is a reserve study?
The reserve study is a budget planning tool which identifies the current
status of the reserve fund and a stable and equitable funding plan to offset the expected
future major common area expenditures. The reserve study consists of two parts: the
Physical Analysis and the Financial Analysis.
3) What is the physical analysis?
The physical
analysis is a component study of the major common area components. It
consists of:
The first four elements of the physical analysis play a pivotal role in the success of the long-term funding plan. They are, in essence the building blocks of the reserve study and form the foundation upon which the financial analysis is built.
4) What is the financial analysis? 5) What is the reserve allocation?
The financial
analysis is a funding study that utilizes information in the physical analysis to
determine:
6) What is a funding plan?
The
funding plan is a primary part of the financial analysis that consists of a funding
method and a funding goal.
7) What funding methods are utilized to determine the
reserve allocation?
Various funding methodologies have evolved
to determine this allocation, however, the component, straight-line and cash flow methods
dominate most reserve study reports.
8) What is the component and straight-line method of
determining the reserve allocation?
The component method
determines reserve allocation by dividing cost by useful life for each component and then
totaling. The straight-line method
is similar, and determines reserve allocation by dividing the difference between fully
funded balance and reserve balance by the remaining life for each component and then
totaling. Both methods provide for “independent
funding” of each component.
9) What is the cash flow method of determining the
reserve allocation?
The
cash flow method determines reserve allocation by projecting reserve
allocations and disbursements over a timeframe of thirty years
and testing different allocations until a minimum allocation is found that maintains a
Percent Funded or Net Reserve Balance amount above a specified funding goal (perhaps a Net
Reserve Balance of zero dollars for Baseline Funding).
This method provides for “collective funding” of all
components.
10)
What are the funding goals established in the plan?
Independent of methodology utilized, the following represents the basic
categories of funding plan goals:
11)
What are the different levels of service provided in a reserve study report?
A) Level
1 Reserve Study (Full)- A Reserve Study in which the following five Reserve Study
tasks are performed:
B) Level 2 Reserve Study (Update, With-Site-Visit/On-Site Review)- A Reserve Study update in which the following five tasks are performed:
C) Level 3 Reserve Study (Update, No-Site-Visit/Off-Site Review)- A Reserve Study update with no on-site visual observations in which the following three tasks are performed:
12) How often should a reserve study be conducted?
The board should conduct a reserve study that includes an 'on-site'
inspection of accessible reserve items at least every three years (consult
applicable state statutes for any additional compliance requirements). These
necessary updates provide statutory compliance and allow for adjustments due to actual
year-end reserve balance and the unpredictable nature of the lives of many of the reserve
components under consideration. Licensed general contractors should always perform
the inspection.