Condo Media - July 2013 - 49

for an association’s future reserve fund
planning. Baseline funding allows for
the cash flow to reach $0 at some time
over the projection period. Full funding is based on keeping each individual
component 100 percent funded and
in most instances results in having a
significant amount of money stored
without use for long periods of time.
Threshold funding aims to maintain a
predetermined amount of money in the
fund throughout the cash-flow projection period. This amount is generally
more than baseline funding and less
than full funding. Lastly, statutory
funding is when the amount to be
funded is dictated by the local state
requirements.

Replacement costs
must be accurate.
Replacement costs should not always be based upon a replacement with
the exact same component. In many
instances the original component may
not be available or has become outdated since it was first installed. By making
recommendations for alternatives to
the initial installation, the association
may be able to install a replacement
with a significantly longer life such as a
new type of roofing system or something that is more energy efficient such
as a new HVAC system. Smart replacements can result in a reduction to the
recommended contributions to the
reserve fund and/or a reduction in the
client’s energy costs.

A reserve study has many uses.
In addition to estimating the association’s contributions to the reserve
fund, a reserve study cash flow analysis
can be used as a tool for determining
how the association’s reserve funds
can be invested. They give the association the ability to plan for actual
replacements, therefore making it
easier to negotiate more effectively
with contractors. The cash-flow
analysis will show how much money
will be in the reserve fund and over
what period of time. By reviewing
this information with the associa-

tion’s investment advisor, an investment
plan can be established to maximize the
return on these funds based upon when
they will be needed. Furthermore, by
reviewing the anticipated replacements in
coming years, the association can plan to
have the required work performed before
the actual conditions deteriorate to the
point that remedial work will be required
as part of the replacement, which can
cause a significant increase in the actual
cost of doing the work. For example,
if the application of the seal coating on
pavement is not performed on the recommended schedule, even if the concrete
looks good, it can result in additional deterioration of the pavement that must be
corrected prior to the application of an
overlay. This can reduce the anticipated
time period before the overlay is needed
and increase the cost of the work.

A reserve study is not a
maintenance schedule.
A reserve study is not the only
funding an association will need for
the upkeep of its common elements.
The reserve study is only for the major repair or replacement of the common and limited common elements
that are the association’s responsibility. In all cases the cost of ongoing
maintenance should also be budgeted
separately, as this is not included
within the reserve study. If the proper
maintenance is not performed, it can
result in a significant loss of useful life
for the reserve components. This will
result in their replacement occurring

sooner than anticipated when adequate funds have not yet been accumulated.

Reserve studies
are budgeting tools.
Because a reserve study is only a
budgeting tool it must be recognized
that the actual cost of performing
replacement work when it occurs will
generally vary from the costs included
within the study. In preparing the
reserve study, replacement costs are
based upon both estimating standards
as well as the actual cost of similar projects. The replacement costs are typically based upon current dollars and
are not based upon the preparation of
specifications and bidding of the work
to actual contractors. It is intended to
be used as a budget-planning tool. In
order to keep the replacement costs
as well as the anticipated useful lives
current, the reserve study should be
updated, including a site visit, on a
regular basis. CM
Mitchell H. Frumkin, PE, CGP, RS is
president of Kipcon Inc. He is a
licensed professional engineer in 15
states, reserve specialist, and certified
green professional.

Condo Media • July 2013

Condo Media - July 2013

Table of Contents for the Digital Edition of Condo Media - July 2013