By Richard Hirschman, ARS, Inc.
Every homeowners association should have a current reserve analysis to coincide with its annual operating budget. Following a (reserve) funding plan is crucial to preventing the three things reserve specialists don't like to see: a special assessment, deferred maintenance, or a sharp increase in reserve contributions. Interpreting a reserve analysis can be a daunting task, whether it's your first time or you have read many. They are long – can be 100 pages or more – have several summaries, graphs, and a whole lot of numbers that can confuse and deter any community manager or board member. But there are a few key factors to look for to understand one like a pro!
First, all reserve studies should have an Executive Summary. This is usually one page and shows the report results as a percentage compared to 100% funded. It also shows the first-year funding plan shown in annual, monthly, and monthly per unit figures. Understanding the executive summary will help you know your community's current overall financial health – as it relates to reserves. Reviewing the executive summary with your board will usually focus the board’s attention very quickly because it can see how much money is recommended to be contributed into reserves annually and monthly. The board will immediately compare that to what it is currently contributing.
Second, look for a summary sorted by the year of replacement; in our reports, it is the Annual Expenditure Detail (sorted by description). This summary sorts each component by the component’s year of replacement over 30 years. Summaries are an excellent tool for managers and the board because you can look at upcoming years and see how much money is projected to be spent out of reserves and what components are recommended to be replaced. For example, if a community's roof is recommended to be replaced in 2023, the manager and board can start preparing for this expense by getting bid proposals and inspections as needed.
Third, you want to examine the Projections page. This page shows the recommended funding plan over 30 years. It also contains other vital information such as projected beginning balance, annual member contribution, annual expenditure costs, launched annual ending balance, projected annual fully funded balance, and annual percent funded. This page is a great tool to examine the progress of your community's financial contribution reserve efforts during 30 years.
The last key factor to look at when interpreting a reserve analysis is examining the component detail section. This section looks at each component in the reserve analysis on one page. The component detail section is what drives the summaries (key factors) listed above. Each page in the component detail section has a title or component description, placed-in-service date, useful life, and remaining life, as well as a replacement year. It also shows the quantities, unit cost, future cost, a comments section, and a component photo.
Finally, ask for help! Your Reserve Specialist is specifically trained to help explain the results of the analysis and offer funding recommendations specifically designed to ensure every member of your community pays their fair share at any given time throughout the life of your community. And remember, there is no "one size fits all" for a reserve funding plan. Each community is unique, and a reserve analysis is designed explicitly for your community.
Richard Hirschman has been a reserve specialist practicing throughout Colorado since 2009. He is a past Chairman of the CAI Programs and Education Committee and is committed to helping HOA boards understand and communicate reserve studies to their communities. For more information, please visit his website at www.arsinc.com/colorado.
