Fundamentals of Reserves Course #9626392 Approved for 1 Hour of Continuing Education Credit by the State of Florida Department of Business and Professional Regulation for licensed Community Association Managers. Subject Area: IFM/ELE

Course Presenter CE Provider #PVD252 Will Simons, RS 40,000 Completed Reserve Studies since 1986 Regional offices nationwide Pioneers of many industry-wide principles Will Simons, RS President Florida Regional Office "Fundamentals of Reserves" Association Reserves - Florida, LLC

"Fundamentals of Reserves" Association Reserves - Florida, LLC Course Outline What are Reserves? Reserve Study Basics What do Board Members Need to Know? Test Questions "Fundamentals of Reserves" Association Reserves - Florida, LLC

"Fundamentals of Reserves" Association Reserves - Florida, LLC

"Fundamentals of Reserves" Association Reserves - Florida, LLC What are reserves? "Fundamentals of Reserves" Association Reserves - Florida, LLC

"Fundamentals of Reserves" Association Reserves - Florida, LLC The Budget Reserve Funds Infrequent costs Restricted use Funds accumulate until need arises Typical uses: roofing, painting, pavement, HVAC, elevators, etc. Operating Funds “Routine” costs Unrestricted use Expected to be spent in the year collected Typical uses: utilities, insurance, management fees, routine maintenance "Fundamentals of Reserves" Association Reserves - Florida, LLC

"Fundamentals of Reserves" Association Reserves - Florida, LLC “In addition to annual operating expenses, the budget shall include reserve accounts for capital expenditures and deferred maintenance. These accounts shall include, but are not limited to, roof replacement, building painting, and pavement resurfacing, regardless of the amount of deferred maintenance expense or replacement cost, and for any other item for which the deferred maintenance expense or replacement cost exceeds $10,000.” Florida Statutes 718.112 (Condominiums) "Fundamentals of Reserves" Association Reserves - Florida, LLC

“…the association is responsible for the repair and maintenance of capital improvements that may result in a special assessment if reserves are not provided…” -- Florida Statutes 720.303 (HOAs) "Fundamentals of Reserves" Association Reserves - Florida, LLC

"Fundamentals of Reserves" Association Reserves - Florida, LLC Practical Definition “Money that an association saves over long periods of time for large repair and replacement projects.” "Fundamentals of Reserves" Association Reserves - Florida, LLC

"Fundamentals of Reserves" Association Reserves - Florida, LLC HALL OF SHAME "Fundamentals of Reserves" Association Reserves - Florida, LLC

"Fundamentals of Reserves" Association Reserves - Florida, LLC HALL OF SHAME "Fundamentals of Reserves" Association Reserves - Florida, LLC

"Fundamentals of Reserves" Association Reserves - Florida, LLC HALL OF SHAME "Fundamentals of Reserves" Association Reserves - Florida, LLC

"Fundamentals of Reserves" Association Reserves - Florida, LLC HALL OF SHAME "Fundamentals of Reserves" Association Reserves - Florida, LLC

"Fundamentals of Reserves" Association Reserves - Florida, LLC HALL OF SHAME "Fundamentals of Reserves" Association Reserves - Florida, LLC

"Fundamentals of Reserves" Association Reserves - Florida, LLC HALL OF SHAME "Fundamentals of Reserves" Association Reserves - Florida, LLC

"Fundamentals of Reserves" Association Reserves - Florida, LLC Reserve Study Basics "Fundamentals of Reserves" Association Reserves - Florida, LLC

"Fundamentals of Reserves" Association Reserves - Florida, LLC “A budget planning tool which identifies the current status of the Reserve fund and provides a stable and equitable Funding Plan to offset the anticipated future major common area expenditures.” -National Reserve Study Standards (NRSS), Est. 1998 "Fundamentals of Reserves" Association Reserves - Florida, LLC

Levels of Service Level 1 “Full” Level 2 Update “With Site Visit” Site inspection done for first time, from scratch Establishing component list for the first time Level 2 Update “With Site Visit” New site inspection to re-evaluate conditions Should be done at 3-5 year intervals Level 3 “No Site Visit” No site inspection involved Should be done every year, unless a Level 2 is due "Fundamentals of Reserves" Association Reserves - Florida, LLC

"Fundamentals of Reserves" Association Reserves - Florida, LLC Two Parts Physical Analysis Financial Analysis "Fundamentals of Reserves" Association Reserves - Florida, LLC

Part 1: Physical Analysis QUANTIFY EVALUATE PHOTOGRAPH "Fundamentals of Reserves" Association Reserves - Florida, LLC

Part 2: Financial Analysis RESEARCH CONCLUSIONS DISCUSSION "Fundamentals of Reserves" Association Reserves - Florida, LLC

"Fundamentals of Reserves" Association Reserves - Florida, LLC Three Outcomes #2 Percent-Funded #3 Funding Plan #1 Component List "Fundamentals of Reserves" Association Reserves - Florida, LLC

Outcome #1 – Component List Listing of life and cost estimates Framework should remain fairly constant Ideally looks 30+ years into the future "Fundamentals of Reserves" Association Reserves - Florida, LLC

National Reserve Study Standards Four-Part Test: 1. Association Responsibility 2. Limited Useful Life (UL) 3. Predictable Remaining Useful Life (RUL) 4. Above Minimum Threshold Cost "Fundamentals of Reserves" Association Reserves - Florida, LLC

"Fundamentals of Reserves" Association Reserves - Florida, LLC Specifically mentioned by Florida Statute 718 Roofing Painting Pavement Resurfacing Elevators HVAC Balconies/Walkway Decks Fire Alarm & Suppression Lake & Pond Maintenance Site Elements (Fencing, Lighting, Etc.) Exterior Waterproofing Amenity Area Upgrades Interior/Lobby Remodeling Misc. Mechanical Systems (Security, Backup Power, etc.) ….And More "Fundamentals of Reserves" Association Reserves - Florida, LLC

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"Fundamentals of Reserves" Association Reserves - Florida, LLC HALL OF SHAME "Fundamentals of Reserves" Association Reserves - Florida, LLC

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Outcome #2 – Percent Funded “Snapshot in time” of financial strength Measures likelihood of financial problems Will fluctuate over time "Fundamentals of Reserves" Association Reserves - Florida, LLC

"Fundamentals of Reserves" Association Reserves - Florida, LLC PERCENT-FUNDED Can be thought of as similar to a credit score, since it measures risk. Quick, snapshot assessment of an association’s long-term financial health "Fundamentals of Reserves" Association Reserves - Florida, LLC

How is it calculated? ÷ How much money you have How much money you SHOULD have = Percent Funded "Fundamentals of Reserves" Association Reserves - Florida, LLC

"Fundamentals of Reserves" Association Reserves - Florida, LLC How much you have…Easy! Projected Reserve account balance at start of the next fiscal year "Fundamentals of Reserves" Association Reserves - Florida, LLC

How is it calculated? ÷ How much money you have How much money you SHOULD have = Percent Funded "Fundamentals of Reserves" Association Reserves - Florida, LLC

How much you SHOULD have… Also known as the “Fully Funded Balance” If I tell you my association has $50,000 in Reserves, does that really tell you anything? "Fundamentals of Reserves" Association Reserves - Florida, LLC

"Fundamentals of Reserves" Association Reserves - Florida, LLC $50,000…sounds like a lot! "Fundamentals of Reserves" Association Reserves - Florida, LLC

"Fundamentals of Reserves" Association Reserves - Florida, LLC Fully Funded Balance Current Age Expected Useful Life x Current Replacement Cost "Fundamentals of Reserves" Association Reserves - Florida, LLC

Example: “Seaview Condominiums” "Fundamentals of Reserves" Association Reserves - Florida, LLC

Starting Reserve Balance (sum of all Reserve money) $60,000 January 1, 2017 "Fundamentals of Reserves" Association Reserves - Florida, LLC

"Fundamentals of Reserves" Association Reserves - Florida, LLC Roof Replacement Age UL x Cost = FFB 10 Years 20 Years x $80,000 = $40,000 "Fundamentals of Reserves" Association Reserves - Florida, LLC

"Fundamentals of Reserves" Association Reserves - Florida, LLC Fitness Equipment Age UL x Cost = FFB 5 Years 15 Years x $30,000 = $10,000 "Fundamentals of Reserves" Association Reserves - Florida, LLC

"Fundamentals of Reserves" Association Reserves - Florida, LLC Hallway Painting Age UL x Cost = FFB 2 Years 8 Years x $100,000 = $25,000 "Fundamentals of Reserves" Association Reserves - Florida, LLC

Seaview Condominiums = Percent Funded Total Reserve Money Sum of all Components’ Fully Funded Balances "Fundamentals of Reserves" Association Reserves - Florida, LLC

"Fundamentals of Reserves" Association Reserves - Florida, LLC Seaview Condominiums $75,000 Projected starting balance $60,000 Sum of Fully Funded Balances: $40,000 (Roof) +$10,000 (Fitness Equipment) +$25,000 (Painting) $75,000 = 80% Funded "Fundamentals of Reserves" Association Reserves - Florida, LLC

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Outcome #3 – Funding Plan Review of current budgeted contribution to Reserves Should match the frequency of regular assessments May include special assessment recommendations "Fundamentals of Reserves" Association Reserves - Florida, LLC

Key Principles Sufficient cash available (never below $0) Stable contribution rate Distributed among all components Fiscally responsible "Fundamentals of Reserves" Association Reserves - Florida, LLC

"Fundamentals of Reserves" Association Reserves - Florida, LLC 1. Sufficient Cash Should be obvious… If cash goes below zero at any point, special assessments or loans are required "Fundamentals of Reserves" Association Reserves - Florida, LLC

2. Stable Contribution Rate Pay YOUR share of ongoing deterioration Avoid “balloon” contributions Small percentage increases are expected "Fundamentals of Reserves" Association Reserves - Florida, LLC

3. Properly Distributed Funding ALL Reserve components simultaneously One contribution amount, allocated appropriately among all components "Fundamentals of Reserves" Association Reserves - Florida, LLC

4. Fiscally Responsible Realistic assumptions for interest and inflation Cannot ignore/minimize reality of the situation Fair treatment of present and future owners Regardless of actions of prior members!!! "Fundamentals of Reserves" Association Reserves - Florida, LLC

What do Board Members need to know? We’re going to end tonight by discussing why a Reserve Study is important.

Fiduciary duty: an association board must act in homeowners’ best interests Good business practice: financial planning should incorporate the advice of experts Recommended by AICPA, CAI, banks, management firms, and more Documented financial strength = lending advantages

The Big Picture

"Fundamentals of Reserves" Association Reserves - Florida, LLC test questions "Fundamentals of Reserves" Association Reserves - Florida, LLC

"Fundamentals of Reserves" Association Reserves - Florida, LLC 1. An air conditioner is currently 10 years old. Its expected useful life is 20 years. The replacement cost is $8,000. What is its current Fully-Funded Balance? $8,000 $3,000 $4,000 $12,000 "Fundamentals of Reserves" Association Reserves - Florida, LLC

"Fundamentals of Reserves" Association Reserves - Florida, LLC 2. Which typical Reserve expense is named specifically by Florida statute 718? A) Elevator modernization B) Pavement resurfacing C) Balcony resurfacing D) Pool resurfacing Others: Roof replacement, building painting…anything $10,000 or more "Fundamentals of Reserves" Association Reserves - Florida, LLC

"Fundamentals of Reserves" Association Reserves - Florida, LLC 3. Which of the following is a part of the National Reserve Study Standards’ “4-Part Test”? A) Must be the association’s responsibility B) Limited useful life C) Predictable remaining useful life D) Above minimum threshold cost E) All of these are included "Fundamentals of Reserves" Association Reserves - Florida, LLC

"Fundamentals of Reserves" Association Reserves - Florida, LLC 4. A recommended funding plan must have which of the following characteristics: A) Sufficient cash available B) Stable contribution rate C) Proper distribution D) Fiscally responsible E) All of the above "Fundamentals of Reserves" Association Reserves - Florida, LLC

5. The two parts to a Reserve Study are the physical analysis and the legal analysis. A) TRUE B) FALSE The two parts are the physical analysis and the financial analysis. "Fundamentals of Reserves" Association Reserves - Florida, LLC

"Fundamentals of Reserves" Association Reserves - Florida, LLC Thank you!....Questions? "Fundamentals of Reserves" Association Reserves - Florida, LLC