If a reserve component has a remaining useful life of 0, does this mean it must be done?

Absolutely NOT! A Reserve Study is a prediction of the assets in their current state. Often times components last longer than they are expected to, and sometimes don’t last as long as we hope. At the time of an on-site inspection (Level I or Level II), our site inspectors use their expertise to determine approximate life based on observation and any additional information provided by management or the board.

The Board is discussing adding a tennis court where there is currently a large grass area. Is this considered a capital expenditure, or can we expense it from the reserve account?

While we are not attorneys (and one may be beneficial to consult), we consider all existing components reservable items. However, since both situations want to change an existing reserve component, this would not be a reasonable reserve expense. Funds can be raised through a special assessment, or other similar means. Operating budget/excess money???

What projects can the Board pay from reserves?

All association reserve-able assets are outlined in the reserve study. In our reports, the component detail can be found in the Component Identification Report. Reserve expenses must meet some criteria: 1. Must be an association's common area maintenance item 2. Must have limited life 3. Must have predictable remaining life 4. Cost must be above minimum threshold Some reserve study guidelines are best discussed by the Board infrequently, but occassionally to understand and stay up-to-date with the reserve study. An example is to establish a minimum threshold for all reserve items. For small communities the threshold could be $500, and for large high-rises or master-planned communities closer to $1000 or $1500 are reasonable. There are other factors to take into consideration. There are, of course, exceptions.

Is each line item a maximum that we, the Board, are allowed to spend?

Not the case! Each line item you see in the Component Identification Report is an estimate for its upcoming expense in an estimated amount of remaining years. In reality, if three bids were to be collected for the same scope, you would get three different prices. The maintenance may be more or less invasive, the materials available may be different, and other factors can affect the cost. When the Board (or a board member acting on behalf of the board) reviews the reserve study annually, actual bids and scopes of work can be developed and incorporated into the reserve study.

We don't see a line item for the block walls (or plumbing, concrete, structure, etc), can I use reserve funds?

I have two follow up questions to this inquiry. How much is the expense? Are there more repairs of this nature needed, or will this solve the problem? Once an association encounters an issue that is not a typical reserve expense, we recommend adding it to the reserve study. The next time an issue arrises, we will already have the prior entry as a starting point.

What financial documents are needed?

We will need the association's most recent month's Balance Sheet and Income Statement. We are keying into the reserve account on these two documents for the monthly reserve allocation and reserve balance. The reserve allocation is generally not difficult to determine. The reserve balance, however, is only a starting point to estimate the reserve balance at fiscal year end. To estimate this, we start with the month's balance as stated in the financials, add remaining months (before FYE) allocation, and subtract any known expenditures.

Can the Board borrow from reserves?

We recommend you seek advise from your community manager and/or legal representation. Here are some general guidelines, keep in mind this may or may not apply to your specific situation. If a Board decides to cover short-term debt with reserve funds, the funds must be paid back within one (1) year.

Percent Funded, what does it really mean?

Percent funded is a calculation to express how well funded an association is relative to the fully funded figure. If a community is fully funded (100% funded), then it has funded to the levels determined by the costs, full lives, and remaining lives identified in the Component Identification Report. In SCT reserve studies, the rightmost column on the Component Identification Report shows the fully funded amount for each component, category, and totals. 100% funded does not equal current cost. To be 100% funded does not mean that a community could afford to replace 100% of the common area tomorrow. Here's another way to think about it: To understand the whole, we break it down into pieces. It is really a math equation: (reserve balance)/(100% funded)*(1/100)= ___% First, we need to determine the estimated reserve balance at fiscal year end. Second, the Component Identification Report will identify the 100% funded value. Third, do the math!

What does it mean to be over- or under-funded?