MANAGING
FINANCIAL RESERVES
BEST PRACTICE:
Careful planning for future repairs and replacements is in the best physical and fiscal
interests of the community association. Maintaining a reserve fund not only meets legal,
fiduciary and professional requirements, it also minimises the need for special levies, and
enhances resale values. How does an association properly determine
and compile adequate reserves to fund necessary repair
and replacement costs? By conducting reserve studies.
RESERVE COMPONENTS
YES
Reserve studies
Step 2 - Is the component covered
under a maintenance contract? YES
NO Step 3 - Is the component included
in another part of the budget? YES
YES Step 4 - Is the component a piece
of mechanical equipment? NO
There are two components of a reserve study – a physical
NO
reserve provider evaluates information regarding the physical
status and repair/replacement cost of the association’s major
common area components.
A reserve study should include:
• • a summary of the association, including the number
of units/stands, physical description and the financial
condition of the reserve fund
• • a projection of the reserve starting balance, recommended
reserve contributions, projected reserve expenses and the
projected ending reserve fund balance for a minimum of 20
years
• • an inventory with component quantity or identifying
descriptions, useful life, remaining useful life and current
replacement cost
• • a description of the methods and objectives utilised in
computing the fund status and in the development of the
funding plan
• • source(s) utilised to obtain component repair or
replacement cost estimates
NO
NO
YES
analysis and a financial analysis. During the physical analysis, a
Step 1 - Review community
documents to determine: Is the
component part of the common
elements?
Step 5 - Is the useful life of the
component within the selected
time window?
Step 6 - Is the replacement cost
below the operating budget
threshold?
This item is a reserve item
NO
YES
This item is not a reserve item
• • a description of the level of service by which the reserve
study was prepared and the fiscal year for which the
reserve study was prepared.
In the interests of transparency and disclosure, experts
recommend that a comprehensive reserve study also includes:
• • a statement disclosing other involvement(s) with the
association that could result in actual or perceived conflicts
of interest
• • a narrative description of the physical analysis that details
how the on-site observations were performed
• • a description of the assumptions utilised for interest and
inflation, tax and other outside factors for the financial
analysis
• • a written explanation of the credentials held by the
individual who prepared the reserve study
• • a report on how the current work is reliant on the validity of
prior reserve studies
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