Frequently Asked Questions.
How are component costs determined?
We prioritize the answer to this question in the following order… best answers will be actual project cost history from our client or a nearby client who has recently done the exact same type of project. The next best resource to answer that question is feedback from our clients’ vendors who have familiarity with the component or project in question. Following that, we look at other similar, but not exact projects that have similar costing models to compare to the components in question and research with vendors not specifically familiar with the client in question. Finally, if we struggle to find locally relevant insights, we may turn to commercially published pricing books.
How are Useful Life (UL) and Remaining Useful Life (RUL) determined?
We maintain an extensive catalog of UL/RUL data which has been accumulated over the last decade and from over 1700 Reserve Studies and hundreds of thousands of components. We also keep this data updated regionally and when confronted with unusual components, similar to researching costs, we will often turn to our vendors and get their feedback on appropriate UL/RUL expectations though the life-cycle of the component in question.
How is Fully Funded Balance calculated?
While this answer will need to represent the sum total of all calculations for each component in your Reserve Study, it is easiest to explain this calculation using a single component. Imagine, if you will, that you have one component with a 10 year UL and a present value of $200,000 which is 3 years old. For this component it would be expected that Reserves be funded with 1/10th of it’s present value for each year of life completed. For this item 1/10th per year is $20,000 times 3 years of age = $60,000 for this component’s fully funded target balance. Following this calculation for each component and totaling them will give you the total targeted “Fully Funded Balance” for the year the report is being prepared. Logically, this value changes each year AND when components are changed or projects completed, the Fully Funded Balance for those items reverts back to $0 and begins growing again as time progresses.
How long does a Reserve Study take to complete?
Our standard delivery time for a study that includes an inspection is 8 weeks from receipt of contract and deposit. Standard delivery for a non-inspection Update is 4 weeks from the same. However, we do allow for requests for expedited processing which may or may not incur a rush fee, based on our current volume of work in the pipeline at the time of the request.
How often should a Reserve Study be updated?
Some states have legislation in place that requires updates every 3rd year of 5th year, while other states may not have any formal requirements for frequency of updating your Reserve Study. However, trying to properly understand the funding levels needed to maintain your property and its components without a relatively recent Reserve Study is incredibly difficult to do. Further, many lenders who are underwriting buyers risk levels who want to move into your community may require an updated Reserve Study if it has been too long since the Reserve Study had been updated. As more and more special assessments occur due to Reserve Fund shortfalls, many of which end with an owner going into foreclosure for lack of ability to pay large special assessments, lenders are growing more and more concerned with stability of Reserve Funds for the community when underwriting their new loans for buyers.
What is the difference between a FULL Reserve Study and an Update with an Inspection?
A FULL Reserve Study - often called a Reserve Study from scratch because every component will be identified, evaluated, quantified (measured or counted or both), photographed, inventoried, and current funding is analyzed and future funding guidance is given. This method is used when a community has never had a Reserve Study done previously, when a prior Reserve Study is far to old to usefully update, or when prior studies conducted have fallen significantly short of National Reserve Study Standards and the report needs to be re-evaluated from scratch. An Update with Site Visit or Inspection works off of a recent, previous Reserve Study that has met National Reserve Study standards and updates, costs, UL/RUL, conditional assessments, photographs and inventory changes, current funding levels, and recommended ongoing funding guidance.
What are the differences between Baseline, Threshold and Full Funding Models?
All three models should aim to avoid volatile funding changes from year to year, be adequate to meet the financial needs of the community and be fairly shared by all community members. With those fundamental thoughts in mind, baseline funding is a model which will dictate a funding schedule which will allow all expected component funding needs to be met without Reserve Balances falling below zero and without triggering any necessary special assessments. This would be considered the minimal expectation for funding Reserves. Threshold funding is a model that maintains Reserve Balances between a desired range of Funding Percentages (as a percent of Fully Funded Balance Figures). For example, a board of directors may want to know what funding would be necessary to maintain 70% - 80% Funded over the coming 30 years. This model would be known as a Threshold funding example. Finally, Fully Funded models schedule the necessary level of Reserve Contributions that will all a community to gradually grow to and reach a FULLY FUNDED Reserve balance by or before the end of the 30 year period of the Reserve Study.
Isn’t it the job of the Board of Directors to keep assessments low and steady?
We are going to ruffle some feathers on this one! No. Simply, No! While we would love it if that could be done legitimately while also allowing that board of directors to do their job as good fiduciaries; making sure they are keeping the property in good condition, protecting property values, doing due diligence in researching what it costs to run the community, and making sure they have funds to pay for said upkeep… steady, low, rarely increasing assessments are rarely feasible.
Inflation alone will require recognition of increased costs which have to be absorbed by increases in community budgets. Simply put, the job of the board is to determine how to effectively and efficiently, properly maintain your community and to budget accordingly. They then inform the members of the community about said budget realities and whether or not increases are needed. It is the community member’s duty to determine if they can continue to afford to live in a community. The board of directors cannot have a goal to keep assessments flat or affordable etc. if the reality of TRUE costs mandate that increases in assessments are needed from either the Operations and/or Reserve (or other) Budgets.