RESERVE STUDIES
What exactly is a Reserve Study? It is a financial forecast that calculates the funding requirements to replace your infrastructure assets and other components for which the organization has maintenance responsibility. The process culmintaes in a long term capital replacement budget, a funding plan that can be incorporated into your dues structure, giving you an accurate picture of your cost recovery needs. Our Reserve Study report will cover a 30-year period and will incorporate inflation, estimated interest earnings, financing programs and repayment of debt. We can project level funding requirements, funding plans linked to estimated inflation rates, or customized plans.
DETAILS OF THE RESERVE STUDY
The system works using basic data for each component:
- Acquisition date
- Acquisition cost
- Estimated replacement cost
- Estimated service life, total and remaining
In addition, certain general information, system-wide as opposed to applying to individual components, is also used in the process:
- Estimated inflation rates to apply to replacement costs
- Estimated interest earnings on invested funds
- Cash Manager - Detail of invested funds, interest rates, and terms
- Estimated contribution rate changes
- Consideration of new financing programs
- Consideration of debt service costs
The reserve preparer should be able to rapidly consider various alternatives to create a unique, flexible funding plan. We recommend updating the RS report annually to keep the funding plan as consistent as possible.
Factors to consider in building the study
The replacement cost of any component is not just the cost of the component itself, but also the added sales tax, transportation costs, labor, removal of old component, and installation of new component. As an example, replacing a roof should include not just the cost of new roofing material itself, but the cost to remove old roof, if necessary, and installation cost of the new roof. Funding of reserves will consider several significant assumptions. One of these assumptions is the inflation assumption as a factor that will be applied to the current replacement cost amount in determining what inflation rate will apply over the remainder of the funding period. Generally, we will look at a funding period of 30 years. Another assumption will be whether or not interest income is retained within the reserve fund and therefore be available to help mitigate against the funding of replacement costs of all common area components. Having made the determination of whether interest income should be included or not, the next consideration is what interest earnings rate should be assumed over the 30 year period of the projection period. The final significant assumption involves the funding method itself. Should funding be held on a level basis for a 30 year period, or should it assume some increase? For instance, a 3 - 5 % annual increase in funding may occur based upon the natural rate of inflation that will apply to user fees over the 30-year period of time.
Consider variables, alternatives, and substitutes, and how they should be applied to each component. For instance, maintenance procedures may help prolong the life of the certain components, or there may be alternate substitute products that are available at a lower cost or at the same cost that would have a longer life. These items must be considered before a projection can be made.
If you’re the type of association that just wants to perform the minimum study to comply with the civil code, we can do that for you. But, we really shine when we are facing the very tough reserve studies from the most demanding of our clients. When you have unique maintenance issues, a tough financing plan, or the desire to leverage your reserve study into a full asset management tool, we can deliver for you.
The 3 most important things an Association should get from a RS Report are:
1. A solid financial plan with reports that make sense
2. Supported by a competent site observation and evaluation of the common area components.
3. Guidance in the development of a structured maintenance plan to minimize overall future costs.
Our Reserve Studies give you all three.