1. Fundamentals of Reserves
Course #
Approved for 1 Hour of Continuing Education Credit by the State of Florida Department of Business and Professional Regulation for licensed Community Association Managers.
Subject Area: IFM/ELE

2. Course Presenter CE Provider #PVD252 Will Simons, RS
40,000 Completed Reserve Studies since 1986
Regional offices nationwide
Pioneers of many industry-wide principles
Will Simons, RS
President Florida Regional Office
"Fundamentals of Reserves" Association Reserves - Florida, LLC

3. "Fundamentals of Reserves" Association Reserves - Florida, LLC
Course Outline
What are Reserves?
Reserve Study Basics
What do Board Members Need to Know?
Test Questions
"Fundamentals of Reserves" Association Reserves - Florida, LLC

4. "Fundamentals of Reserves" Association Reserves - Florida, LLC

5. "Fundamentals of Reserves" Association Reserves - Florida, LLC
What are reserves?
"Fundamentals of Reserves" Association Reserves - Florida, LLC

6. "Fundamentals of Reserves" Association Reserves - Florida, LLC
The Budget
Reserve Funds
Infrequent costs
Restricted use
Funds accumulate until need arises
Typical uses: roofing, painting, pavement, HVAC, elevators, etc.
Operating Funds
“Routine” costs
Unrestricted use
Expected to be spent in the year collected
Typical uses: utilities, insurance, management fees, routine maintenance
"Fundamentals of Reserves" Association Reserves - Florida, LLC

7. "Fundamentals of Reserves" Association Reserves - Florida, LLC
“In addition to annual operating expenses, the budget shall include reserve accounts for capital expenditures and deferred maintenance. These accounts shall include, but are not limited to, roof replacement, building painting, and pavement resurfacing, regardless of the amount of deferred maintenance expense or replacement cost, and for any other item for which the deferred maintenance expense or replacement cost exceeds $10,000.”
Florida Statutes (Condominiums)
"Fundamentals of Reserves" Association Reserves - Florida, LLC

8. “…the association is responsible for the repair and maintenance of capital improvements that may result in a special assessment if reserves are not provided…”
-- Florida Statutes (HOAs)
"Fundamentals of Reserves" Association Reserves - Florida, LLC

9. "Fundamentals of Reserves" Association Reserves - Florida, LLC
Practical Definition
“Money that an association saves over long periods of time for large repair and replacement projects.”
"Fundamentals of Reserves" Association Reserves - Florida, LLC

10. "Fundamentals of Reserves" Association Reserves - Florida, LLC
HALL OF SHAME
"Fundamentals of Reserves" Association Reserves - Florida, LLC

11. "Fundamentals of Reserves" Association Reserves - Florida, LLC
HALL OF SHAME
"Fundamentals of Reserves" Association Reserves - Florida, LLC

12. "Fundamentals of Reserves" Association Reserves - Florida, LLC
HALL OF SHAME
"Fundamentals of Reserves" Association Reserves - Florida, LLC

13. "Fundamentals of Reserves" Association Reserves - Florida, LLC
HALL OF SHAME
"Fundamentals of Reserves" Association Reserves - Florida, LLC

14. "Fundamentals of Reserves" Association Reserves - Florida, LLC
HALL OF SHAME
"Fundamentals of Reserves" Association Reserves - Florida, LLC

15. "Fundamentals of Reserves" Association Reserves - Florida, LLC
HALL OF SHAME
"Fundamentals of Reserves" Association Reserves - Florida, LLC

16. "Fundamentals of Reserves" Association Reserves - Florida, LLC
Reserve Study Basics
"Fundamentals of Reserves" Association Reserves - Florida, LLC

17. "Fundamentals of Reserves" Association Reserves - Florida, LLC
“A budget planning tool which identifies the current status of the Reserve fund and provides a stable and equitable Funding Plan to offset the anticipated future major common area expenditures.”
-National Reserve Study Standards
(NRSS), Est. 1998
"Fundamentals of Reserves" Association Reserves - Florida, LLC

18. Levels of Service Level 1 “Full” Level 2 Update “With Site Visit”
Site inspection done for first time, from scratch
Establishing component list for the first time
Level 2
Update
“With Site Visit”
New site inspection to re-evaluate conditions
Should be done at 3-5 year intervals
Level 3
“No Site Visit”
No site inspection involved
Should be done every year, unless a Level 2 is due
"Fundamentals of Reserves" Association Reserves - Florida, LLC

19. "Fundamentals of Reserves" Association Reserves - Florida, LLC
Two Parts
Physical Analysis
Financial Analysis
"Fundamentals of Reserves" Association Reserves - Florida, LLC

20. Part 1: Physical Analysis
QUANTIFY
EVALUATE
PHOTOGRAPH
"Fundamentals of Reserves" Association Reserves - Florida, LLC

21. Part 2: Financial Analysis
RESEARCH
CONCLUSIONS
DISCUSSION
"Fundamentals of Reserves" Association Reserves - Florida, LLC

22. "Fundamentals of Reserves" Association Reserves - Florida, LLC
Three Outcomes
#2 Percent-Funded
#3 Funding
Plan
#1 Component List
"Fundamentals of Reserves" Association Reserves - Florida, LLC

23. Outcome #1 – Component List
Listing of life and cost estimates
Framework should remain fairly constant
Ideally looks 30+ years into the future
"Fundamentals of Reserves" Association Reserves - Florida, LLC

24. National Reserve Study Standards Four-Part Test:
1. Association Responsibility
2. Limited Useful Life (UL)
3. Predictable Remaining Useful Life (RUL)
4. Above Minimum Threshold Cost
"Fundamentals of Reserves" Association Reserves - Florida, LLC

25. "Fundamentals of Reserves" Association Reserves - Florida, LLC
Specifically mentioned by Florida Statute 718
Roofing
Painting
Pavement Resurfacing
Elevators
HVAC
Balconies/Walkway Decks
Fire Alarm & Suppression
Lake & Pond Maintenance
Site Elements (Fencing, Lighting, Etc.)
Exterior Waterproofing
Amenity Area Upgrades
Interior/Lobby Remodeling
Misc. Mechanical Systems (Security, Backup Power, etc.)
….And More
"Fundamentals of Reserves" Association Reserves - Florida, LLC

26. "Fundamentals of Reserves" Association Reserves - Florida, LLC
HALL OF SHAME
"Fundamentals of Reserves" Association Reserves - Florida, LLC

27. "Fundamentals of Reserves" Association Reserves - Florida, LLC
HALL OF SHAME
"Fundamentals of Reserves" Association Reserves - Florida, LLC

28. "Fundamentals of Reserves" Association Reserves - Florida, LLC
HALL OF SHAME
"Fundamentals of Reserves" Association Reserves - Florida, LLC

29. "Fundamentals of Reserves" Association Reserves - Florida, LLC
HALL OF SHAME
"Fundamentals of Reserves" Association Reserves - Florida, LLC

30. "Fundamentals of Reserves" Association Reserves - Florida, LLC
HALL OF SHAME
"Fundamentals of Reserves" Association Reserves - Florida, LLC

31. Outcome #2 – Percent Funded
“Snapshot in time” of financial strength
Measures likelihood of financial problems
Will fluctuate over time
"Fundamentals of Reserves" Association Reserves - Florida, LLC

32. "Fundamentals of Reserves" Association Reserves - Florida, LLC
PERCENT-FUNDED
Can be thought of as similar to a credit score, since it measures risk.
Quick, snapshot assessment of an association’s long-term financial health
"Fundamentals of Reserves" Association Reserves - Florida, LLC

33. How is it calculated? ÷ How much money you have
How much money you SHOULD have =
Percent Funded
"Fundamentals of Reserves" Association Reserves - Florida, LLC

34. "Fundamentals of Reserves" Association Reserves - Florida, LLC
How much you have…Easy!
Projected Reserve account balance at start of the next fiscal year
"Fundamentals of Reserves" Association Reserves - Florida, LLC

35. How is it calculated? ÷ How much money you have
How much money you SHOULD have =
Percent Funded
"Fundamentals of Reserves" Association Reserves - Florida, LLC

36. How much you SHOULD have…
Also known as the “Fully Funded Balance”
If I tell you my association has $50,000 in Reserves, does that really tell you anything?
"Fundamentals of Reserves" Association Reserves - Florida, LLC

37. "Fundamentals of Reserves" Association Reserves - Florida, LLC
$50,000…sounds like a lot!
"Fundamentals of Reserves" Association Reserves - Florida, LLC

38. "Fundamentals of Reserves" Association Reserves - Florida, LLC
Fully Funded Balance
Current Age
Expected Useful Life
x Current Replacement Cost
"Fundamentals of Reserves" Association Reserves - Florida, LLC

39. Example: “Seaview Condominiums”
"Fundamentals of Reserves" Association Reserves - Florida, LLC

40. Starting Reserve Balance (sum of all Reserve money)
$60,000
January 1, 2017
"Fundamentals of Reserves" Association Reserves - Florida, LLC

41. "Fundamentals of Reserves" Association Reserves - Florida, LLC
Roof Replacement
Age UL
x Cost = FFB
10 Years
20 Years
x $80,000 =
$40,000
"Fundamentals of Reserves" Association Reserves - Florida, LLC

42. "Fundamentals of Reserves" Association Reserves - Florida, LLC
Fitness Equipment
Age UL
x Cost = FFB
5 Years
15 Years
x $30,000 =
$10,000
"Fundamentals of Reserves" Association Reserves - Florida, LLC

43. "Fundamentals of Reserves" Association Reserves - Florida, LLC
Hallway Painting
Age UL
x Cost = FFB
2 Years
8 Years
x $100,000 =
$25,000
"Fundamentals of Reserves" Association Reserves - Florida, LLC

44. Seaview Condominiums = Percent Funded Total Reserve Money
Sum of all Components’ Fully Funded Balances
"Fundamentals of Reserves" Association Reserves - Florida, LLC

45. "Fundamentals of Reserves" Association Reserves - Florida, LLC
Seaview Condominiums
$75,000
Projected starting balance
$60,000
Sum of Fully Funded Balances:
$40,000 (Roof)
+$10,000 (Fitness Equipment)
+$25,000 (Painting)
$75,000
= 80% Funded
"Fundamentals of Reserves" Association Reserves - Florida, LLC

46. "Fundamentals of Reserves" Association Reserves - Florida, LLC
HALL OF SHAME
"Fundamentals of Reserves" Association Reserves - Florida, LLC

47. "Fundamentals of Reserves" Association Reserves - Florida, LLC
HALL OF SHAME
"Fundamentals of Reserves" Association Reserves - Florida, LLC

48. "Fundamentals of Reserves" Association Reserves - Florida, LLC
HALL OF SHAME
"Fundamentals of Reserves" Association Reserves - Florida, LLC

49. "Fundamentals of Reserves" Association Reserves - Florida, LLC
HALL OF SHAME
"Fundamentals of Reserves" Association Reserves - Florida, LLC

50. Outcome #3 – Funding Plan
Review of current budgeted contribution to Reserves
Should match the frequency of regular assessments
May include special assessment recommendations
"Fundamentals of Reserves" Association Reserves - Florida, LLC

51. Key Principles Sufficient cash available (never below $0)
Stable contribution rate
Distributed among all components
Fiscally responsible
"Fundamentals of Reserves" Association Reserves - Florida, LLC

52. "Fundamentals of Reserves" Association Reserves - Florida, LLC
1. Sufficient Cash
Should be obvious…
If cash goes below zero at any point, special assessments or loans are required
"Fundamentals of Reserves" Association Reserves - Florida, LLC

53. 2. Stable Contribution Rate
Pay YOUR share of ongoing deterioration
Avoid “balloon” contributions
Small percentage increases are expected
"Fundamentals of Reserves" Association Reserves - Florida, LLC

54. 3. Properly Distributed
Funding ALL Reserve components simultaneously
One contribution amount, allocated appropriately among all components
"Fundamentals of Reserves" Association Reserves - Florida, LLC

55. 4. Fiscally Responsible
Realistic assumptions for interest and inflation
Cannot ignore/minimize reality of the situation
Fair treatment of present and future owners
Regardless of actions of prior members!!!
"Fundamentals of Reserves" Association Reserves - Florida, LLC

56. What do Board Members need to know?
We’re going to end tonight by discussing why a Reserve Study is important.

57. Fiduciary duty: an association board must act in homeowners’ best interests
Good business practice: financial planning should incorporate the advice of experts
Recommended by AICPA, CAI, banks, management firms, and more
Documented financial strength = lending advantages

58. The Big Picture

59. "Fundamentals of Reserves" Association Reserves - Florida, LLC
test questions
"Fundamentals of Reserves" Association Reserves - Florida, LLC

60. "Fundamentals of Reserves" Association Reserves - Florida, LLC
1. An air conditioner is currently 10 years old. Its expected useful life is 20 years. The replacement cost is $8,000. What is its current Fully-Funded Balance?
$8,000
$3,000
$4,000
$12,000
"Fundamentals of Reserves" Association Reserves - Florida, LLC

61. "Fundamentals of Reserves" Association Reserves - Florida, LLC
2. Which typical Reserve expense is named specifically by Florida statute 718? A) Elevator modernization B) Pavement resurfacing C) Balcony resurfacing D) Pool resurfacing
Others: Roof replacement, building painting…anything $10,000 or more
"Fundamentals of Reserves" Association Reserves - Florida, LLC

62. "Fundamentals of Reserves" Association Reserves - Florida, LLC
3. Which of the following is a part of the National Reserve Study Standards’ “4-Part Test”? A) Must be the association’s responsibility B) Limited useful life C) Predictable remaining useful life D) Above minimum threshold cost E) All of these are included
"Fundamentals of Reserves" Association Reserves - Florida, LLC

63. "Fundamentals of Reserves" Association Reserves - Florida, LLC
4. A recommended funding plan must have which of the following characteristics: A) Sufficient cash available B) Stable contribution rate C) Proper distribution D) Fiscally responsible E) All of the above
"Fundamentals of Reserves" Association Reserves - Florida, LLC

64. 5. The two parts to a Reserve Study are the physical analysis and the legal analysis. A) TRUE B) FALSE
The two parts are the physical analysis and the financial analysis.
"Fundamentals of Reserves" Association Reserves - Florida, LLC

65. "Fundamentals of Reserves" Association Reserves - Florida, LLC
Thank you!....Questions?
"Fundamentals of Reserves" Association Reserves - Florida, LLC