Reserve Study Terms
We are often asked about what the different terms within a reserve study mean. Here is a list of some of the most common terms and definitions.
Cash Flow Method
A method of developing a Reserve Funding Plan where contributions to the Reserve fund are designed to offset the variable annual expenditures from the Reserve fund. Different Reserve Funding Plans are tested against the anticipated schedule of Reserve expenses until the desired Funding Goal is achieved.
The individual line items in the Reserve Study, developed or updated in the Physical Analysis. These elements form the building blocks for the Reserve Study. Components typically are:
· Association responsibility
· with limited Useful Life expectancies
· predictable Remaining Useful Life expectancies
· above a minimum threshold cost
· as required by local codes.
The list of Reserve Components. Developing this list can be accomplished through on-site visual observations, review of association design and organizational documents, a review of established association precedents, and discussion with appropriate association representative(s) of the association or cooperative.
A method of developing a Reserve Funding Plan where the total contribution is based on the sum of contributions for individual components. See “Cash Flow Method.”
The task of evaluating the current condition of the component based on observed or reported characteristics.
An actual (or projected) Reserve Balance less than the Fully Funded Balance. The opposite would be a Surplus.
The difference between Useful Life and Remaining Useful Life. Not always equivalent to chronological age, since some components age irregularly. Used primarily in computations.
The portion of a Reserve Study where current status of the Reserves (measured as cash or Percent Funded) and a recommended Reserve contribution rate (Reserve Funding Plan) are derived, and the projected Reserve income and expense over time is presented. The Financial Analysis is one of the two parts of a Reserve Study.
100% Funded. When the actual (or projected) Reserve balance is equal to the Fully Funded Balance.
Fully Funded Balance (FFB)
Total Accrued Depreciation. An indicator against which Actual (or projected) Reserve balance can be compared. The Reserve balance that is in direct proportion to the fraction of life “used up” of the current Repair or Replacement cost. This number is calculated for each component, then summed together for an association total. Two formulae can be utilized, depending on the provider’s sensitivity to interest and inflation effects. Note: Both yield identical results when interest and inflation are equivalent.
· FFB = Current Cost X Effective Age / Useful Life
· FFB = (Current Cost X Effective Age / Useful Life) + [(Current Cost X Effective Age / Useful Life) / (1 + Interest Rate) ^ Remaining Life] – [(Current Cost X Effective Age / Useful Life) / (1 + Inflation Rate) ^ Remaining Life]
Reserve Fund Status
The status of the reserve fund as compared to an established benchmark such as percent funding.
Independent of methodology utilized, the following represent the basic categories of Funding Plan goals:
· Baseline Funding: Establishing a Reserve funding goal of keeping the Reserve cash balance above zero.
· Full Funding: Setting a Reserve funding goal of attaining and maintaining Reserves at or near 100% funded.
· Statutory Funding: Establishing a Reserve funding goal of setting aside the specific minimum amount of Reserves required by local statues.
· Threshold Funding: Establishing a Reserve funding goal of keeping the Reserve balance above a specified dollar or Percent Funded amount. Depending on the threshold, this may be more or less conservative than “Fully Funding.
An association’s plan to provide income to a Reserve fund to offset anticipated expenditures from that fund.
· Sufficient Funds When Required
· Stable Contribution Rate over the Years
· Evenly Distributed Contributions over the Years
· Fiscally Responsible
Life and Valuation Estimates
The task of estimating Useful Life, Remaining Useful Life, and Repair or Replacement Costs for the Reserve components.
The ratio, at a particular point of time (typically the beginning of the Fiscal Year), of the actual (or projected) Reserve Balance to the Fully Funded Balance, expressed as a percentage.
The portion of the Reserve Study where the Component Inventory, Condition Assessment, and Life and Valuation Estimate tasks are performed. This represents one of the two parts of the Reserve Study.
Remining Useful Life (RUL)
Also referred to as “Remaining Life” (RL). The estimated time, in years, that a reserve component can be expected to continue to serve its intended function. Projects anticipated to occur in the initial year have “zero” Remaining Useful Life.
The cost of replacing, repairing, or restoring a Reserve Component to its original functional condition. The Current Replacement Cost would be the cost to replace, repair, or restore the component during that particular year.
Actual or projected funds as of a particular point in time that the association has identified for use to defray the future repair or replacement of those major components which the association is obligated to maintain. Also known as Reserves, Reserve Accounts, Cash Reserves. Based upon information provided and not audited.
An individual that prepares Reserve Studies.
A budget planning tool which identifies the current status of the Reserve fund and a stable and equitable Funding Plan to offset the anticipated future major common area expenditures. The Reserve Study consists of two parts: the Physical Analysis and the Financial Analysis. “Our budget and finance committee is soliciting proposals to update our Reserve Study for next year’s budget.”
An assessment levied on the members of an association in addition to regular assessments. Special Assessments are often regulated by governing documents or local statutes.
An actual (or projected) Reserve Balance greater than the Fully Funded Balance.
Useful Life (UL):
Total Useful Life or Depreciable Life. The estimated time, in years, that a reserve component can be expected to serve its intended function if properly constructed in its present application or installation.