finance

 

Illustration: A Capital Reserve Study
Editor’s Note: The following, while in no way the only method for doing so, illustrates one of the ways a board can present a capital reserve study for the owners’ adoption and input. Click here to download a graph of this illustration.

Example: A study was completed by the Gulf Coast Condominium Association to estimate the useful lives and replacement cost of the components of common property. Replacement costs were based on historical cost plus estimated increases to repair or replace the common property components at the date of the study. Estimated current replacement costs do not take into account the effects of inflation between the date of the study and the date that the components will require repair or replacement. The following information is based on the study and presents significant information about the components of common property.

Just as any business owner must reassess the business’ operations periodically, the association should also revisit the reserve study and funding plan on a regular basis, but usually no less often that every four to five years. Other factors in determining whether or not to revise the plan may include the following:

• Additions or replacements of any significant item of the common elements.

• Extreme wear and tear to the common elements from unseasonable weather, lack of proper maintenance or other significant changes in building material, labor costs or building codes.

• Catastrophic events such as hurricanes, fires or windstorms and any insurance proceeds received to effect repairs on reserve items.

• Changes to anticipated scheduled dates for replacements.

• Actual reserve income or investment fluctuations as compared to the amounts anticipated and budgeted.

If properly planned, budgeted and funded, reserve funds collected from unit owners are considered a contribution to the association’s capital and are not subject to potential income taxes. Also, capital replacement reserves are an important component of any financial audit the association may be required to have by law or vote of the board. Your auditor is required to report on any reserve funding plan or lack thereof and its potential financial effects to the association.

A well-thought-out and properly funded capital reserve study will ensure that the association will have adequate funds available in the future to effect needed repairs, will eliminate any future surprise special assessments and will allow the members and potential owners to see that the association’s long-term financial health is properly managed to the benefit of all.