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Is Your Condominium Reserve Fund Functional?

 


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In my younger days with an engineering consulting firm, my mentor offered me some memorable advice. When your solution appears more complex that the client's problem (which it did) then it's time to check your data. That advice could well apply if you're putting together a reserve fund plan for your condominium association or HOA.

The ultimate intent of a capital reserve fund study, of course, is to know if your reserve account will cover the cost for replacing the common area components over the long term. And if it doesn't, what do you need to do about it. The first step in checking the adequacy of reserves is, naturally enough, to determine the cost to replace each component in today's dollars. Dividing the replacement cost by its service life in years tells you how much should be set aside annually to replace it. Multiplying that amount by the years of use tells you the total dollars that should be in reserve today replace it when it's time to do so. Summing up the values for all components yields the amount you should have in your reserve account today to replace all components according to their individual schedules. Clearly then the numbers used for expected service and anticipated remaining lives of components will have a significant outcome on the bottom line. Using handbook values of the construction industry for typical service lives does not always work. One size does not necessarily fit all. If the material used departs significantly from typical level workmanship then the handbook value is going to lead to flawed conclusions. The same applies to the expected remaining service life. If unique conditions have been causing accelerated wear of your roof shingles, then clearly some informed adjustment is needed. Also, any deferred maintenance that shortens the expected remaining life, clearly impacts on how the reserve fund needs to accumulate. But maybe replacement may not be needed right now. Perhaps the component could be repaired and placed back on track with a revised service life. You might accommodate that with a separate entry in the plan.

Intuitively, we understand that if a building component is in poor condition or is performing better than we expected that adjustments need to be made in the timing of its replacement. But there invariably instances arise where a refined judgment is unquestionably needed. In our experience, it's rare to see projects in which that is not the case to some degree. And, of course, it helps when explaining things too others if that judgment is accompanied by the opinion of a recognized professional. Take time to think through the parameters that will structure your reserve plan. It will only be as sound as the data that feeds into it.

Robert J. Burns is a principal with Burns Associates-Engineers. The firm offers capital reserve fund studies and developer transition studies for condominium associations and HOA. Engineering consulting services for building and site services are offered. Mr. Burns is a licensed professional engineer and CAI credentialed Reserve Specialist. http://www.burnsengineers.com

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