5 Reasons to Hire a Professional Reserve Analyst

It is that time of year again, time to prepare the next year’s reserve budget.  Should you hire a Professional Reserve Analyst or simply review the previous year’s budget for any obvious changes?  If the board of directors does not have a clear picture of which Reserve Components should be reserved for and access to the latest funding methods of meeting these goals, then we say they are not meeting their fiduciary responsibility to the members.  Here are five reasons to ask for help:

1. Preserve The Value of your Property
One of the after-effects of the recent banking meltdown is a change to the way we buy or sell community association property. It is all but impossible to get any Federal Mortgage program to participate in a mortgage without a Reserve Study being part of the closing documents.  Many banks and private lenders in the private sector are now requiring a reserve study to ensure they are making a wise investment.  Would you buy a property that came with thousands of dollars of debt because an assessment for a major repair was pending?  Do you think you could sell your property with a pending assessment?  Think about how marketable your property would be if it had built-in equity because of a healthy reserve balance.

2. Remove The Liability From The Board of Directors
Preparation and updating a Reserve Study is a tremendous responsibility for the board of directors. This certainly is one area where the board should seek professional advice. Statutes § 718.112 requires condominium associations to fund a reserve account for certain capital expenditures and deferred maintenance. The statute requires all condominium associations to maintain reserves for roof replacement, building painting, pavement resurfacing and “any other item for which deferred maintenance expense or replacement cost is expected to exceed $10,000.” See Fla. Stat. § 718.112. These rules are more ridged and specific than what the law requires for HOA’s. For the purpose of this discussion, we will focus primarily on condominium associations in Florida.
 
It is ultimately the board’s responsibility to determine and maintain the reserve needs of the association.  In many cases, the phrase “any other item for which deferred maintenance expense or replacement costs is expected to exceed $10,000,” is either overlooked or simply ignored by the association to prevent fees from increasing. Items commonly excluded from the reserve budget include, but are not limited to, gutters, fencing, interior finishes, exercise equipment, pool resurfacing, pool equipment, patio furniture, automatic gates, etc. By consulting with a Reserve Specialist, a board of directors can avoid future liability and sometimes devastating financial issues.  A Reserve Specialist will supply the association with an inventory of all applicable items that an association can reserve for, as well as recommendations on how to fund the reserve budget. It is then up to the members to decide whether or not to fully fund the reserve account.

3. Understand Funding Options
In order to determine the reserve needs of the association, the board must accurately present the funding computations to its members.

The Component Funding Analysis, commonly referred to as “Straight-Line” calculates the annual contribution amount for each individual line item component by dividing the component’s remaining unfunded balance by its remaining useful life. A component’s unfunded remaining balance is its replacement cost less the reserve balance for the component at the beginning of the analysis period. The annual contribution rate for each individual line item component is then summed to calculate the total annual contribution rate for this analysis. Straight-line accounting is based on current costs and either interest or inflation is factored into the calculations. Using this funding method, every account is restricted to the item listed.  Here the allocation of existing reserve funds dictates the annual reserve requirement. This should never be the case, the expenditures should ALWAYS dictate the annual reserve requirements.
 
The 30 Year Pooled Cash Flow Funding Plan is a method of calculating reserve contributions where contributions to the reserve funds are designed to offset the variable annual expenditures from the reserve fund. This analysis calculates the future replacement costs for reserve components, the date the component is due for replacement and recognizes increases in construction costs as well as interest income attributable to reserve accounts. Funds from the beginning balances are pooled together and a yearly contribution rate is calculated to arrive at a positive cash flow throughout the analysis period. The Cash Flow method will provide an association with flexibility and the luxury of looking at the “big picture” by providing a 30 year plan which accounts for interest income and inflation. In the author’s opinion, the Cash Flow method is the obvious superior funding method. Using this plan the expenditures will dictate the annual reserve requirements.

4. Realistic Replacement Costs
The first step after identifying the Reserve Components to be funded by the association is to determine their useful life and current cost. The greatest casualty to a reserve budget often occurs when a high dollar reserve component expires earlier than expected. If the replacement cost of that pre-mature item was accurately forecasted by the association’s reserve fund, the damage will be significantly minimized to your members’ wallets or purses. Your Reserve Specialist will update each reserve component with the most accurate replacement cost, taking into account current codes and industry changes that can affect the replacement cost significantly. For example, the cost of obtaining a new roof today will be much higher then when the building was constructed. Technology changes, materials last longer and are more expensive and there may be HVAC equipment on the roof needing to be lifted. Unlike your operating budget, Reserve Components can be very unpredictable as there are many variables that may come into play. A Reserve Analyst will provide this information to the association and ultimately reduce the risk of a special assessment.

5. Annual Updates
Many associations avoid consulting with a Reserve Analyst when determining the association’s reserve funding simply because of the initial cost to the association. The cost of the initial reserve study is always more expensive due to the data collection and initial analysis required to be completed. In the following years however, the study can be updated for a fraction of the original cost. As long as there are no major changes to reserve items, the study can simply be updated without the expense of another site-visit. It is recommended that a site visit be completed every 3-4 years. It also does not hurt to ask for a better price — most companies are willing to work with the board as they want your business!

- Brad Felten, PRA