reserve studies: it's all about the financials
TRANSCRIPT
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3650 Concorde Parkway – Suite 100, Chantilly, VA 20151 · www.usicommercial.com
It’s All About the Financials
Managing Your Reserve Funds
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Agenda
• Introductions and participation guidelines 5 minutes• Presentation objectives and discussion 35 minutes• Audience participation and Q&A 10 minutes
• Moderator – Martin Smith, Director of Training• Expert – David Rothbart, Director of Reserve Study Operations
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Bio – David Rothbart, RS
• David Rothbart, RSDirector of Reserve Study OperationsCAI Certified Reserve SpecialistNSEC Certified Environmental ConsultantState of Virginia Certified InspectorNevada Licensed Reserve SpecialistTremendous experience planning and completing studies
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• Questions encouraged
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About USI Commercial
• 25 years of service• National coverage• Industry leading technology• Local employee service delivery• Skilled local employee Reserve Study Specialists• Centralized and standardized reporting• Professional engineering• Other services
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Objectives
• How to properly manage your Reserve Funds• The pitfalls of a lump sum Reserve account• Reserve fund percentage threshold management
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How to properly manage your Reserve Funds
Associations maintain reserve funds so they can deal with long term needs for maintaining and replacing the common components.
• Reserve funds do not fund the associations everyday expenses for operation• Without appropriate funded reserves it can force special
assessment or loans
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How to properly manage your Reserve Funds
When the association chooses to impose special assessment as a standard method of managing component repair or replacement it causes
• Full benefit of members who are moving without contribution
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How to properly manage your Reserve Funds
Once a reserve fund is established, it should only be used for appropriate expenditures
•Use the reserve funds for repairs or replacement of major capital items
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How to properly manage your Reserve Funds
• Minor repairs should be made from the operating budget
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How to properly manage your Reserve funds
Developer related transition items should be paid for from the reserve fund
• Developer refused to pay for transition issues• Loan may be necessary
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How to properly manage your Reserve funds
Occasionally, a major project arises and the association does not have sufficient funds set aside to cover the expenses loans may be necessary
• The interest, in some cases, may be charged to the reserve fund
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How to properly manage your Reserve funds
It is most certainly a mistake to borrow funds from your reserve account to cover items in your operating budget
• Can have negative tax consequences• Indicates a lack of proper budgeting
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The pitfalls of a lump sum Reserve account
Although a robust reserve fund is highly desirable, there is sometimes too much variation in properties to have one specific formula for allocation of reserve funds
• Full or Component funding• Direct oriented method of reserve funding
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The pitfalls of a lump sum Reserve account
Lump sum reserve accounts can create havoc with the association’s management of reserve funds due to the following
• No earmarking of funds defeats the purpose of the reserve study• Creates a true “Rob Peter to Pay Paul” situation over time• Analogous to running a household without a budget
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The pitfalls of a lump sum Reserve account
Create reserve fund folders
• Reserve study creates reserve account folders• Promotes fiscal responsibility
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The pitfalls of a lump sum Reserve account
For example we will say that the association has 50K in reserves
• Roof 20K• Asphalt 15K• Paint 7K• Pool resurface 8K
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The pitfalls of a lump sum Reserve account
The following reflects actual costs for the association
• Roof 25K spent• Asphalt 20K spent• Paint 7K beyond funds available• Pool resurface 8K beyond funds available
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The pitfalls of a lump sum Reserve account
When the reserve study is packaged we help the association plan for allocation of reserve funds at given times during the course of the study
• Association will know how to compartmentalize funds• Assure ample money set aside for component repairs and
replacements
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Reserve fund percentage threshold
The reserve fund percentage threshold is basically a financial picture of how healthy the association is
• No lower than 60-64% funded over long periods of time• Percentages over 70% for consecutive years show sound
financial health
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How to Handle Surprise Expenses
Example of how reserve fund percentage is represented in the study
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Reserve fund percentage threshold
Several methods available to correct a continually sliding percent funded are
• Increase the monthly allocation to reserves from monthly dues• Increase the monthly dues per member• Special assessments• Loans
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In conclusion
It is important to remember that theoretically, a perfect funding plan achieves 100% reserve funding, however this does not mean that anything less than 100% renders the association unhealthy
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Let us help you
• By reviewing your reserve study needs
• By providing a proposal• www.usicommercial.com/reserve-study
• By providing presentations
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Contact Info for Your Reserve Study Needs
888.225.3755