By G. Michael Kelson, Aspen Reserve Specialties
At the annual meeting, the treasurer reports that there is $175,000 in the Reserve account. To most people, hearing that figure mentioned usually makes you pretty happy. I mean, wouldn’t you be excited to hear you have $175,000 in your savings account? Unfortunately, what is not mentioned is the fact that asphalt work, painting, and pool resurfacing is all scheduled the following year, and the cost of these projects is about $150,000, essentially depleting the Reserve account.
If someone is measuring the financial strength of an association, what is the best way to go about gathering this information? Review the budget and balance sheet only? As you saw in the example above, a starting balance does not paint the full picture. In our opinion, the best way to determine the overall health of an associations financial status is through the Reserve Study.
The Reserve Study will provide a long-term budget tool for the association to plan for future capital replacement expenditures. A Reserve Study is compiled by a professional evaluating the conditions of Reserve components at the time of a site visit. In addition, when on site, the professional will measure and quantify the assets the association is responsible to maintain. Once the field work is completed, the professional will estimate the replacement cost of the components and compare the balance of the Reserve fund to “what should be in” the Reserves at that point in time. This is called the percent funded. Of course, the higher the percentage, the stronger your Reserve fund may be.
Now, there are times the percent funded may be low (30% or lower), but because the association is either recently constructed, or recently had major Reserve projects completed, the fund may be considered in a “weak” position. However, with no major projects scheduled for many years, there is no need to sound the alarm. In cases like this, the association has plenty of time to strengthen the account through Reserve contributions and nominal annual increases before the projects are scheduled for replacement. Of course, the recommendation needs to be followed, and the report should be updated frequently (every 2 – 3 years is ideal).
There are many benefits of being in a strong financial position. It provides more wiggle room for an issue that unexpectedly comes up, or a cushion in case the project costs a little more due to underlying issues the professional was unaware of at the time of the site evaluation. It allows you the opportunity to hire the BEST contractor, not the cheapest. And of course, the association is able to maintain the property as needed, rather than deferring maintenance, which impacts the overall property value.
Let’s face it, there are also things that happen in life in which we cannot prepare. Huge snow years, hailstorms, COVID! In these times, the Reserve contribution may not be able to be transferred. Or you may need to borrow from Reserves to help pay for operating expenses. Understand this is okay to do, as long as the association adopts a repayment plan. Typically, this repayment plan will take place over the following 12-18-month period. Of course, this option should only be considered if the Reserve fund is in a strong enough financial position to continue to address projects as they come up.
In conclusion, when measuring the financial strength of your association, be sure you are looking at the big picture. Is the association able to meet the demands of the operating budget? Does the association appear to be in good condition (paint is in good condition, asphalt is free from major potholes and cracks, landscaping is well manicured, etc.)? But the best tool to use in determining the overall health of the association is through the Reserve Study and the percent funded position.
G. Michael Kelsen, RS, PRA has been in the Reserve Study business for almost 30 years. In 2001, he started his own company, Aspen Reserve Specialties, and has been successfully addressing the Reserve Study needs of his clients ever since. Aspen Reserve Specialties completes between 150 – 200 Reserve Studies each year for Condominiums, townhomes, high rises, loft buildings, commercial properties, schools, and places of worship.