What is a Reserve Plan?
A Reserve Plan is 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. This document is preferably prepared by a qualified iindependent consultant for the benefit of administrators (Board of Directors) of a property with multiple owners, such as a condominium association or homeowners association (HOA), containing an assessment of the state of the commonly owned property components as determined by the particular associations documents and bylaws. Reserve Studies however are not limited only to condominiums and can be created for other properties such as resort (shared vacation ownership) properties, apartment buildings, and office parks.
Reserve Plans are in essence planning tools designed to help the Board anticipate, and prepare for, the property's major repair and replacement projects.
Reserve Plans are in essence planning tools designed to help the Board anticipate, and prepare for, the property's major repair and replacement projects.
Why Plan?
THE IMPORTANCE OF RESERVE PLANNING
As community association boards of directors quickly discover, maintaining the common area/elements of a community association is one of the main purposes of an association. Common area/elements can be limited to something as simple as a flower bed at the community entrance or encompass, in a condominium regime, the entire building exterior including building roofs, stairs, siding/masonry, and occasionally even roads. Funds must be available in order to pay for the replacement, repair, and/or upgrade of these items when it becomes necessary to do so.
RESERVE FUND: Planning ahead for replacement expenses via a Reserve Fund through money collected as part of the association's assessment. This money is set aside specifically for the purpose of maintaining those long-term components of the association. It is important to understand that a replacement fund may be required by state law, community association documents, or a mortgage lender. Planning for the replacement of those items and calculating the amount of money necessary to actually make the repairs or replacement is the Reserve Plan. The depth to which a reserve plan is researched and planned will depend on the scope of the common area to be maintained. Obviously, the more property an association must maintain, the more reserves/replacement funds the association will need to collect. The most common and most fair way to build the replacement fund is to perform a reserve study, establishing the life expectancy of each of the common elements and associating a replacement cost with that element. Once both the replacement cost and remaining life are established, the annual assessment rate is set at an amount that would fund a portion of the necessary funds each year so that at the end of the useful life of the element, the funds are on hand to make the replacement. By transferring funds each year, the replacement cost is fairly distributed among those owners actually using the elements. A long-term owner would pay more into the fund, but that owner would have "used up" a greater portion of the useful life of the replacement item. Each year, the replacement cost would be updated and compared to the funds on hand to determine if the association is on track for funding replacement items. Adjustments can be made with each budget year if a deficiency or surplus is noted in the replacement fund. An added benefit of a replacement fund that is properly funded each year is that this money can be invested to add interest or other return on investment and provide additional funds for the association.
As community association boards of directors quickly discover, maintaining the common area/elements of a community association is one of the main purposes of an association. Common area/elements can be limited to something as simple as a flower bed at the community entrance or encompass, in a condominium regime, the entire building exterior including building roofs, stairs, siding/masonry, and occasionally even roads. Funds must be available in order to pay for the replacement, repair, and/or upgrade of these items when it becomes necessary to do so.
RESERVE FUND: Planning ahead for replacement expenses via a Reserve Fund through money collected as part of the association's assessment. This money is set aside specifically for the purpose of maintaining those long-term components of the association. It is important to understand that a replacement fund may be required by state law, community association documents, or a mortgage lender. Planning for the replacement of those items and calculating the amount of money necessary to actually make the repairs or replacement is the Reserve Plan. The depth to which a reserve plan is researched and planned will depend on the scope of the common area to be maintained. Obviously, the more property an association must maintain, the more reserves/replacement funds the association will need to collect. The most common and most fair way to build the replacement fund is to perform a reserve study, establishing the life expectancy of each of the common elements and associating a replacement cost with that element. Once both the replacement cost and remaining life are established, the annual assessment rate is set at an amount that would fund a portion of the necessary funds each year so that at the end of the useful life of the element, the funds are on hand to make the replacement. By transferring funds each year, the replacement cost is fairly distributed among those owners actually using the elements. A long-term owner would pay more into the fund, but that owner would have "used up" a greater portion of the useful life of the replacement item. Each year, the replacement cost would be updated and compared to the funds on hand to determine if the association is on track for funding replacement items. Adjustments can be made with each budget year if a deficiency or surplus is noted in the replacement fund. An added benefit of a replacement fund that is properly funded each year is that this money can be invested to add interest or other return on investment and provide additional funds for the association.
