1. RESERVE FUNDS & THE RESERVE STUDY: A Multi-purpose Tool
MTU

3. Operating

4. Operating
Reserves

5. Operating
Reserves
Surprises

6. Annual Reserve Expenses

7. Which Components?
How much $?
How much to Contribute?

8. 1998

10. Calculated

11. Which Components Belong?

13. Reserve Component List

14. How much $ should we have?

15. Do we have enough?

16. Have your Reserves kept pace with deterioration?

17. Deficit
Reserve Funds
Deterioration
(Pct Funded under 100%)

18. Balance
Deterioration
Reserve Funds
(Pct Funded = 100%)

19. Surplus
Deterioration
Reserve Funds
(Pct Funded over 100%)

23. How much should we Contribute?

27. Total Budget
Reserves
(Avg 25%)
Operating
15% - 40% Typical

28. Percent Funded

29. Percent Funded

30. Types of Reserve Studies… & Types of Providers?

31. Full 1 2
Update With-Site Visit 3
Update No-Site Visit

32. Do Only Once
Full
WSV
Every Few Years
NSV
In Between Years

33. Who do you Trust?

34. Who do you Trust?
RS or PRA

35. Independence!

36. Simple Summary – Four Reserve Rules

37. Underfunding?

38. And now for the Reality!

39. Reserve Funds
Reserve funds are monies identified for use to defray the future major repair or replacement of components for which the association is obligated to maintain.

40. Reserve Funds
Reserve funds are monies identified for use to defray the ongoing cost of deterioration of components for which the association is obligated to maintain.

41. Why have Reserve Funds Key to a Strong Foundation
Most association documents and many states have laws requiring separate reserve accounts. Having and regularly funding an association's reserve account is key to a strong financial foundation.

42. Adequately funding reserves will accomplish the following:
Fulfill the Board’s fiduciary duty to fund reserves
Ability to make necessary repairs and replacements when needed
Prevent deferred maintenance and greater long term costs
Avoids special assessments and angry homeowners
Reduces liability for Boards
Avoids inability of homeowners to sell or refinance due to buyer or lender concerns over low reserve funds

43. What can Reserve Funds be used for?
1. Reserve funds should only be used for the purpose (maintain a reserve component) they were set aside for. 2. TMT shall recommend that the board not expend funds designated as reserve funds for any purpose other than the repair, restoration or replacement of a major component which the association is obligated to repair and for which the reserve fund was established, or as otherwise authorized under state statutes.

44. It is critical for all associations to have a plan for regularly funding their reserves. How much does and association need? Enter….
The Reserve Study!
Leadership Management Moment
Are you practicing Management with a “C.O.S.” ?
(Communications, Objectives, Structure)
Once quantifiable objectives are defined and agreed upon, the Reserve Study is a critical tool in leading your Board to accomplish their goal.

45. What is a Reserve Study?
A Reserve study is a planning tool designed to help the Board of Directors anticipate and prepare for the repair and replacement of the association’s major physical assets (components) it is responsible for maintaining.

46. A Reserve Study
Identifies the major components and projects their future maintenance requirements
2. Estimates when work will be needed
3. Estimates what the cost will be
Provides recommendation for annual reserve allocations
5. Maintenance obligations for the next 30 years

47. Why Have a Reserve Study?
A reserve study is a critical tool to ensure the Board of Directors understands their association’s long term financials needs and can plan accordingly. Some State statues require reserve studies. A reserve study prepared by a professional is key for the proper management of an association.

48. Boards of Directors have a fiduciary duty to:
Maintain its physical assets (reserve components) according to the governing documents and state statutes
Understand its funding needs & plan accordingly
Levy regular assessments sufficient to perform its obligations under the governing documents, including reserve funding.
Have a reserve study prepared by a professional

49. But Wait…What does it all mean?
The Reserve Study: A Multi-Purpose Tool*
Understanding Reserve Terminology*
*See attachments

50. How is a Reserve Study prepared?
Reserve studies are prepared in a two part process: A visual analysis and a financial analysis.
TMT Point of Differentiation
Trust Reserves
Our product combines professional knowledge with practical management experience. Be sure your Board receives a proposal from a TMT Analyst.
Trusted Partners
Whenever possible, we call upon our trusted vendors for bids and maintenance planning proposals to enhance our reserve study product.

51. Visual Analysis
Identifies major components the association is obligated to repair, replace, restore, or maintain that, as of the date of the study, have a remaining useful life of less than 30 years.
Identifies the probable remaining useful life of the components.

52. Financial Analysis
Includes estimate of the cost of repair, replacement, restoration, or maintenance of the components.
Includes estimate of the total annual contribution necessary to defray the cost of the components during and at the end of their useful life, after subtracting total reserve funds as of the date of the study.
Uses their industry expertise to ‘crunch the numbers’
Key Factors
- Industry standards for accurate life expectancies
- Constant awareness of contractor charges
- Changes in the construction industry

53. Summary of Requirements of a Reserve Study
Identification of major components which have a remaining useful life of 30 years or less, as of the date of the study.
Identification of probable remaining useful life of components.
Estimate of cost to repair, replace, restore, components during and
at end of useful life.

54. Summary of Requirements of a Reserve Study – Cont.
Estimate of total annual allocation necessary, after subtracting total reserve funds as of the date of study.
Percent funded
Separate summary page for publication to homeowners.
Funding plan options
Reserve category balances in percentages
Acceptance of study recorded in the minutes

55. Reading a Reserve Study
Recommended Fund Balance v. Actual Fund Balance
Comparison Graphs
Recommended Annual Allocation
Data Tables
Funding Methods*
Funding Plan Models*
Reserve Study Sample (Division Specific)
* See Reserve terminology attachment

56. Reserve Study Frequency
It is very important to have reserve studies, with an on-site inspection, regularly and accounting updates annually.
Impossible to predict what will happen over a 30 year time period. Inflation, contractor’s insurance costs, interest rates, investment yields etc… can change dramatically over 30 years.
Component conditions change, are repaired or replaced, funding levels change, are not met, etc.
Analogy – Ancient mariners using stars and sun to navigate. Wind, currents etc… could throw them off course. Needed to regularly check position and make course adjustment.

57. TMT Standards and Practical Applications of Reserve Study
Recommend as required by State statute or every three years if no requirement
Should include a reasonably competent and diligent visual inspection of the accessible areas of the major components which the association is obligated to repair, replace, restore or maintain
Board to review this study and have it updated annually
Board to consider and implement necessary adjustments
Exception: Defect Litigation
Reserve Study or Reserve Update is to be performed by a reserve specialist.
TMT recommendation for use of a reserve specialist must be reflected in the meeting minutes.

58. Leadership Management Moment
The review and application of the Reserve Study tool should be guided entirely by management. Doing so reinforces your push to maintain Board focus on quantifiable objectives.
Create the tool (Trust Reserves?)
Adopt the tool (Management with a C.O.S.?)
Review & Refer to the tool (TMT Financial Summary?)
Achieve your goals!

59. Critical to Budgeting Process
Timing: 4 to 5 months prior to FYE
Underfunded: As draft budget preparer, we must recommend measures to correct reserve deficiencies
1. Assessment increase (to maximum if necessary)
2. Special Assessment
3. Association to levy regular and special assessments
sufficient to perform its obligations under governing documents.
Overfunded: Must recommend correction if necessary to eliminate continued overfunding of reserves
Look at funding plan projection
Maintain current level of assessments
Suspend assessments for a period of time
Decrease assessments - requires Leadership review

60. Association’s Duty to Distribute Budget, Reserve & Assessment Documents
Distribution of approved Budget will include a reserve summary based on the most recent review or study conducted which includes the following:  
Current estimated replacement cost of each component
Estimated useful life
Estimated remaining life
As of the end of the fiscal year for which study prepared
Current estimate of cash reserves necessary to repair, replace, restore or maintain major components (Required Fund Balance)
Current amount of cash reserves actually set aside (Actual Fund Balance)
Percentage of funding level

61. Reserve Allocations Reserve Allocation Categories Included in Budget
Monthly Allocations / Percent Contribution by Category
Copy of Entire Reserve Study to Accounting Department
Fund Balance Redistribution – Division Specific
At Beginning of Fiscal Year to align with reserve study
Reflect in the Minutes
Annual Meeting – Revenue Ruling
Board Meeting (Board request for fund shuffle)

62. Reserve Allocations – Cont.
Unfunded Reserve Allocation /Reserve Shortfall
Unrealistic budget
Unforeseen expenses
Overspending
Large one-time expense early in the year
Notify Board of Directors
Methods of Correction
Mid-year budget adjustment
Incorporate in next reserve study
Special assessment

63. Borrowing from Reserves
It is the Boards duty to maintain the integrity of their reserve account. However occasions present themselves which may require or necessitate a Board to borrow from reserves.
Board to maintain the integrity of the reserve account.
If borrowing, it must be recommended that the Board:
Provide written findings
Explanation of transfer needed
Describe plan for repaying the fund
Record above information in the minutes

64. Borrowing from Reserves - Cont
Funds to be restored within one year
Temporary delay exception
Supported by documentation
In the best interest of the association
Recorded in the meeting minutes
If necessary, the Board to levy a special assessment to recover full amount, subject to statute limitations
For litigation purposes:
1. Must notify members in writing
2. Provide a quarterly accounting to members
A copy of the Board resolution must be distributed to the appropriate interoffice departments.

65. Reserve Study as a Planning Tool
Used for scheduling future repairs and maintenance
Used when preparing the annual association calendar
A guide for scheduling work in the appropriate season
Used as a guide & third party validation to focus Board’s maintenance bid requests and scope of work.
Do the work when scheduled or as needed (protective/preventive vs. mechanical)
Leadership
Management
Moment
Maintain Board focus on quantifiable objectives

66. Mechanics of Paying for Reserve Expense
Anticipate expense when signing contracts
Type of Expense – Ask Board - “How are you going to pay for it?”
1. Operating Expense
2. Reserve Expense
3. Contingency Reserve Expense: 3-10%
4. Capital Improvement
C. Reserve Fund: Adequate liquidity, money market transfer, C.D., etc.

67. Mechanics of Paying for Reserve Expense (cont.)
D. Progress Payments: Pre-signed by Board E. The process – Division specific
Critical Path
Consider your role in the process of payment of reserves. Who touches the process before you? After? Think ahead to insure this process is executed well.

68. And Finally….
Quiz
Policy Summary
Questions & Answers

69. The End….