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FAQ's- Frequently Asked Questions

1) What are reserves?
Reserves...Gold!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:

  • component listing
  • current cost estimate for each component
  • useful life estimate for each component
  • remaining life estimate for each component
  • field report or condition assessment (applicable to Level 1 or Level 2 Reserve Studies)

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?
The financial analysis is a funding study that utilizes information in the physical analysis to determine:

  • reserve allocation (proposed budget for next fiscal year)
  • percent funded (strength indicator)
  • cash flow analysis (projection or forecast- a test of the allocation)

 5) What is the reserve allocation?

The reserve allocation is the amount to be annually budgeted towards reserves based on a Funding Plan.  The reserve allocation is a significant part of the overall budget, and therefore, considered a critical element of the funding study.

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:

  • Baseline Funding- Maintaining a Net Reserve Balance at or near zero.
  • Full Funding- Maintaining a Reserve Balance at or near Percent Funded of 100%.
  • Statutory Funding- Maintaining a specified minimum Reserve Balance per statutes.
  • Threshold Funding- Establishing and maintaining a set Net Reserve Balance or Percent Funded.

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:

  • Component Inventory
  • Condition Assessment (based upon on-site visual observations)
  • Life and Valuation Estimates
  • Fund Status
  • Funding Plan

    B)     Level 2 Reserve Study (Update, With-Site-Visit/On-Site Review)- A Reserve Study update in which the following five tasks are performed:

  • Component Inventory
  • Condition Assessment (based upon on-site visual observations)
  • Life and Valuation Estimates
  • Fund Status
  • Funding Plan

    *Note- Updates are reliant on the validity of prior Reserve Studies.

    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:

  • Life and Valuation Estimates
  • Fund Status
  • Funding Plan

    *Note- Updates are reliant on the validity of prior Reserve Studies.

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.

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