RESERVE FUNDING
a reserve expenditure. Once a first-time capital addition has progressed beyond concept and the association has established a clear obligation for its future maintenance or replacement, reserve funding can be incorporated for future projects. Each project should have a defined scope, a planned timeframe, and a cost that can be reasonably estimated. • For example, if an association has formally approved construction of a new clubhouse, funding should be obtained outside of reserves for the initial construction of that clubhouse. However, once the project specifications, including details and design, are finalized and a target con- struction year has been confirmed, reserve funding for future projects such as painting, roof replacement, HVAC, interior remodeling, etc., can be incorporated accordingly. • If the community is updating a component to a different material or equipment type without changing its usage, this is not considered a capital improvement and can be a reserve expense. PREPARATION OF THE FINANCIAL ANALYSIS
FINANCIAL ANALYSIS: The portion of a reserve study where current status of reserves (measured as cash or percent funded) and a recommended reserve funding plan are document- ed and projected reserve income and expenses are presented. The financial analysis is one of the two parts of a reserve study. Funding plans should extend a minimum of 30 years into the future.
Reserve Study Standards define adequate reserves as a replace- ment fund. It’s a stable and equitable multiyear funding plan that provides for the reliable and timely execution of the asso- ciation’s major repair and replacement projects without reliance on supplemental funding. While Reserve Study Standards recognize multiple funding methodologies and funding goals as capable of producing adequate reserves, evolving lender requirements, insurance considerations, and regulatory expectations may limit the prac- tical applicability of certain approaches and increasingly favor higher levels of reserve funding. Associations should evaluate reserve funding methodolo- gies in light of their governing documents, risk profile, lending considerations, insurance requirements, and long-term finan- cial objectives when selecting a funding plan.
KEY FUNDING METHODOLOGY TERMS • Cash flow method (also known as pooling). A method where funding of reserves is designed to offset future expenditures from the reserve fund. This can be prepared to accomplish any of the three funding goals. • Component method (also known as straight line). A method where total funding is based on the sum of funding for individual components.
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