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HOMEOWNER ASSOCIATION: FAQ

WHAT OTHERS SAY

"We had no idea what to prioritize, no idea what the costs would be to prevent and or replace, and had no context to establish a reserve fund. Thanks to PHIS we now have a plan and can be confident that we are saving at an appropriate rate to protect our real estate assets. If you are on a board of a condo association - I would highly recommend this service."

Graham.S., Oak Park Condo President

What is a Reserve Fund?

A reserve fund is money kept in a separate account [bank and/or investment] used to pay for projects such as planned maintenance, repairs, replacements, or restoration of major common elements such as the boiler, parking lot or roof. A properly funded reserve will decrease the need for special assessments.

What are the benefits of a Reserve Fund?

The benefits of a Reserve Fund are the following:

  • Results in a more consistent level of assessments.
  • Makes the prospect of a special assessment less likely.
  • Provides more equitable sharing of replacement costs.
  • Helps to prevent the deterioration of the property thereby maintaining property values.
  • Allows board members to fulfill their fiduciary responsibility.
  • Lowers maintenance costs by anticipating repairs, rather than reacting to crisis conditions.

How often should a reserve study be conducted?

We recommend that a reserve study be updated every three to five years (some funding strategies suggest annual updates). Your partnership with Prairie Home Inspection Services can minimize the expense of periodic updates. These periodic updates are necessary to adjust the year end reserve fund balance due to:

  • Over/under assessment amount since the last assessment adjustment.
  • Disbursements from the reserve fund, due to unpredicted circumstance such as weather events, legal issues, etc.

What is a Reserve Study?

The reserve study is a budgeting tool that compares the current amount of the reserve funds to the estimated current replacement costs. The difference between the two amounts results in a suggested funding plan. The reserve study consists of two parts: the Physical Analysis and the Financial Analysis.

What is the physical analysis?

The physical analysis is an evaluation of the building’s common elements. A field report (condition assessment) is created identifying and evaluating the following:

  • Common elements such as the building exterior, hallways, roofs, etc.
  • Useful life (from installation to replacement) estimate for each common element
  • Remaining life (years until replacement) estimate for each common element
  • Current replacement cost estimate for each common element
  • The physical analysis provides the information needed for the financial analysis.

What is the financial analysis?

The financial analysis is a study that gives the homeowner association a suggested yearly assessment plan for the maintenance and/or replacement of the buildings common elements. The plan takes into account items such as the:

  • Difference between the current balance in the fund and the current replacement value of the common elements.
  • The estimated rate of inflation
  • Projected savings [interest] rate on the current reserve fund
  • Contingency amount for unexpected expenditures
  • Funding goals selected by the homeowner association
  • Projection of the reserve balance by each year for 30 years

Are all reserve studies the same?

No, all reserve studies are not the same. The Condominium Association Institute specifies 3 different reserve studies. They are classified as Level 1, Level 2 and Level 3.

Level 1 Reserve Study will include:

  • Creation of the common elements data base
  • Condition assessment of the common elements based on an on-site visual inspection
  • Life and valuation estimates for each common element
  • Fund Status
  • Funding Plan

Level 2 Reserve Study will include:

  • Update/Confirm the common elements data base
  • Condition assessment of the common elements based on an on-site visual inspection
  • Life and valuation estimates for each common element
  • Fund Status
  • Funding Plan

Level 3 Reserve Study will include:

  • Physical inspection or verification of the common elements
  • Life and valuation estimates for each common element
  • Fund Status

What is a funding plan?

A funding plan is a set of guidelines selected by the association that is used for the financial analysis. It consists of a funding goal and a funding method.

What is a funding goal?

A funding goal defines the philosophy of the association in building the reserve fund. The following represents the most common funding goals:

Baseline funding

Maintain a reserve balance at or near zero. Minimize the need for a special assessment. Some characteristics of this goal are:

  • That it provides the lowest assessments
  • That the assessments will vary from year to year much more than with the other two goals
  • That it provides the least amount of protection from unpredictable and unanticipated projects
  • That it has the greatest potential of having a special assessment.

Full Funding

Maintain a reserve at or near 100% of the replacement value on each common element. Some characteristics of this goal are that:

  • It usually results in the highest assessments
  • Assessment is more stable than the other two goals
  • It provides the least likely chance of a special assessment

Threshold Funding

Maintain a reserve balance at a designated dollar amount or a set percentage of funding. Minimize the need for a special assessment. Some characteristics of this method are that the:

  • Assessment amount will be higher than the Baseline goal but lower than the Full Funding goal
  • Assessments vary more than the Full Funding Goal but less than the Baseline goal.
  • Likelihood of a special assessment is greater than the Full Funding goal but less when compared to the Baseline goal

What funding methods support the funding goals above?

Component Method

The compound method is used for the full funding goal. The assessment for each common element is calculated and all the assessments are added together.

Cash Flow Method

The cash flow method is used for the base line and threshold goals. This method provides for “collective funding” of the common elements instead of having an assessment for each common element.