When a professional reserve analyst develops a financial strategy for a common interest community (HOA, Condo, Cooperative) National Reserve Study Standards are taken into account. There are four basic principles in these standards:
- 1. There are adequate reserves when needed
The recommended financial strategy will take into account that some years will have dramatically higher expenses than others (often referred to as Peak or Threshold Years). The overall financial strategy should result in a reserve account balance which is large enough to cover expenses in all periods of time. There is little need for a reserve funding strategies which result in an Associations failure to meet its fiscal responsibility to the membership. Adequately implementing a financial strategy developed by a reserve analyst will result in a positive reserve account balance and adequate funding for those common areas covered in the study.
- 2. The budget should remain stable across years of changing membership and Boards
Costs related to common areas fluctuate widely from one year to the next, sometimes with minimal expenses for a decade or longer. The reserve specialist will develop a strategy that fairly assesses reserve contribution dues while still remaining stable; requiring membership to pay their fair share over time. Often an allocation rate increase that matches the inflation rate is adequate and is a “stable” amount to increase to an annual rate. Note that this stable budget concept does not mean there should be no increases to the allocation rate , in fact the exact opposite is true. A stable increase of 3% per year follows this concept while wide variances such as 3% one year and 10% the next is not fair to the membership in either year.
- 3. The costs are fairly distributed to the membership
The cost to replace the common areas should be fairly distributed across years of membership in a community (current and future members). An adequate reserve allocation rate to the reserve account on an annual basis ensures the condominium community members are paying their fair share of the deterioration of the components. The costs may fluctuate wildly over a 30 year period but if the reserve study is updated annually the Association will be able to assess a fair amount to the membership in any given year and be adequately prepared for the common area replacement expenses when they come up.
- 4. The Financial Strategy must allow the Association / Board to be Fiscally responsible
The membership of a community is counting on the Board to make good long term budgeting decisions. A financial strategy which, say, removed reserve funds to pay for a large capital improvement (e.g. construction of a recreation building )is not a fiscally responsible decision and does not follow the concepts in the National Reserve Study Standards. A reserve specialist will develop a plan which the Board can rely on and implement; the result is a community which stands on solid financial ground.
Written by Joel L Tax - Professional Reserve Analyst - 03/22/2016