Financial Analysis

Reserve Data Analysis

est. 1983

www.rdanorthwest.com

About Reserve Data Analysis

Since 1983 we have provided thousands of thorough and well thought out catered reserve studies and have offices through the US.

Component Analysis Topics

2

3

4

Funding Plan Options & Principles1

Goals of the Funding Plans

Interest & Inflationary Factors

Developing a Financial Strategy

5 Minimizing Reserve Contribution& Common Mistakes

Component Analysis is the Foundation

Reserve

Study

Financial Analysis

Component Analysis

The Financial Analysis is based on the completed Component Analysis. All Funding Plans developed during this phase of the reserve study process are based on the projected expenses of the common area components.

Process - The Reserve Study

Step 1 Step 2 Step 4

Step 3

Component Analysis

Financial Analysis

Develop Financial Strategy

Completed Reserve

Study

Developing a reserve study report requires numerous important steps.

Funding Plans – What Are They?

A Funding Plan is the long term projections of expenses, needed reserves and recommendations to adequately prepare an Association for common area repair & replacement costs.

An adequate Funding Plan will guide an Association to a path of fiscal responsibility.

The goals of a Funding Plan can be driven by the Client, Statutory Requirements or National Reserve Study Standards.

Funding Plan Principles

Sufficient Cash

Stable Contributio

n Rate

Evenly Distributed

Fiscally Responsible

Does the financial strategy follow the four basic principles outlined in National Reserve Study Standards (CAI).

Washington State Statutes

WA State RCW 64.34.382 – Reserve Study - Contents

(i) A recommended reserve account contribution rate, a contribution rate for a full funding plan to achieve one hundred percent fully funded reserves by the end of the thirty-year study period, a baseline funding plan to maintain the reserve balance above zero throughout the thirty-year study period without special assessments, and a contribution rate recommended by a reserve study professional;

Goals of the Different Funding Plans

Statutory (*Threshold)

• A percentage or dollar amount requires by State Law.

• Usually bare minimum reserve allocation rate

Association (*Threshold)

• Developed with specific Association Goals in mind

• May include special assessments, loans, periods of high or low reserve allocation rate

Component Method

• Based on Full Funding Goal• Requires allocation to each

component• Typically higher reserve

contribution but low risk• Not flexible and time

consuming

Recommended

• Reach a full funding level within a time frame (usually 30 yrs)

• Stable reserve contributions rate with stable increases annually.

• Fairness to membership

Baseline

• Keep reserve account above $0 in the time period covered in the study.

• Lower contributions but higher risk for special assessment

Full Funding

• Maintain a 100% Fully Funded Balance

• High reserve contribution rate but low risk for reliance on special assessments.

*Threshold – Any predetermined $ or % figure

Funding Goals– Risk Tolerance

K

S

IR

• Funding plans that require lower reserve balances and allocation rates carry higher risk for special assessments and loans.

• Plans that require a higher reserve balance and allocation rate have a low risk for special assessments, loans and litigation.

• This risk level is calculated in the Reserve Study using a barometer known as “Percent Funded” where 100% is ideal but rarely achieved.

Funding Plan Goal – Finding the Best Fit for the Association

What’s the Best Fit

The funding plan(s) provided in theReserve Study will take into account the specific goals, risk levels and characteristics of the community. Determining what is the“best fit” is the objective of the reserve study professional.

Interest & Inflation Data

Interest is based on the Client provided information with respects to their bank or

investment account interest rate as well as historical

averages.

Inflation rate is based on historical averages and cost manuals. We have great data in the construction industry going back over 100 years!

Taxes are also factored into the interest earned. 15% -

30% is typical for most communities.

Impact of Interest & Inflation

Interest Earned

• Inflation has a much greater impact on the funding plan as it impacts the total replacement costs of all the components.

• Interest is only earned on the actual dollar amount in the reserve account and while beneficial has much less impact.

• **Ignoring inflationary factors is a common reason communities find themselves at poor funding levels. 3% inflation equals a doubling of costs every 24.5 years.

Impact of Inflation

Interest vs Inflation - ExampleReserve Account Balance: $100,000 Replacement Costs : $1,000,0001% Interest Earned / yr. 3% Inflation / yr.

= $1,000 Earned - Positive Impact = $30,000 Additional Funding Needs – Negative Impact

Offsetting Inflation

I D E A

• Offset the impacts of inflation with regular annual increases to the reserve account contribution rate.

• This typically requires a regular increase to the HOA dues. Annually would be most fair to the current and future members of the community.

Develop a Financial Strategy

Forecasting

• Determine Future Costs• Determine Future Replacement Cycles

Review Accounts

• Review Reserve Account Balance(s)• Review Reserve Account Allocation Rates• Assessments, Loans, High Rate of Delinquent Dues, Etc.

Financial Strength

• Determine Current & Future Reserve Fund Strength (Percent Funded)

• Is it adequate? Is it in line with the Association’s risk tolerance?

Considerations for the Recommended Funding Plan

Does the funding plan follow principles outlined in National Reserve Study Standards (CAI)

Is the funding plan fair to the current and future membership of the community.

Can the funding plan be implemented without reliance on special assessments and loans.

Does the funding plan adhere to Statutory Requirements

LAI

Considerations for Special Assessments

A S S S SC

M E N TEPS

• Planning to utilize special assessments for expected costs goes again National Reserve Study Standards

• Special Assessments penalize future members for past members lack of planning and not paying their fair share to the reserve account

• Special assessments have their place – typically emergency funding for unexpected costs.

Numerous Funding Plans Provided

There are many funding strategies to consider but typically only a few will be appropriate for the community and included in the Reserve Study.

Funding Plan - DevelopedThe Recommended Funding Plan will guide the community towards a higher “Percent Funded” while being realistic and fiscally responsible.

Minimize Reserve Contributions

Properly Maintain ComponentsComplete maintenance of components on schedule to maximize the useful life of the common area components. This could include asphalt sealcoating , clearing out the gutters, annual roof inspection & repair, touch up paint between larger paint cycles and carpet cleaning. A longer component useful life equals less deterioration to the component annually and a lower corresponding reserve contribution will be necessary.

No Double DippingReview the budget to make sure the Association is not paying for items out of the operating account and setting aside reserves in the reserve account for the same project. This is considered double dipping and is not appropriate or fair to the membership of the community. An items should either be a reserve component or be paid from the operating budget, not both.

Interest Bearing Bank AccountOpen a reserve account which maximizes bank account interest rates. As the reserve account grow to more significant levels consider investing a portion in very low risk government back securities.

Utilize the Cash Flow Method. This Cash Flow method is appropriate for most communities and allows the funding balance to increase more gradually while keeping reserve contributions lower than a more conservative Component (Straight-line) method.

Avoid These Common Mistakes to Prevent Missing the Target

1. Relying on loans first – typically loan will cost double the amount of adequate planning or special assessing. After a loan the community will be in the position of paying off a loan debt and trying to improve their funding level.

2. Deferring replacement & repair projects – costs go up with time and the deferred maintenance of the project may lead to much larger problems to other components. Additionally the marketability of homes in the community is reduced as Buyers are very wary of communities with deferred maintenance issues.

3. Incorrectly correlating the percent funded barometer in the reserve study with the reserve contribution rate. Depositing 50% of the recommended reserve contribution rate does not equate to a 50% funded level over time. Communities that do so will deplete the reserve account balance in a short period of time.

4. Doing Nothing! Deterioration to common areas works against a reserve budget 24/7 – 365 days a year. The expenditures will happen whether a community plans for them or not. The most responsible, cheapest and fair ways to deal with them is to adequately plan for them years in advance.

Do you haveany questions????

Joel L Tax, PRA

Professional Reserve Analyst

Ph: 866-574-5115 ext. 704

jtax@rdanorthwest.com

Learn more at www.rdanorthwest.com