When a professional reserve analyst develops funding models 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 neededThe recommended funding model will consider that some years will have dramatically higher expenses than others (often referred to as Peak or Threshold Years). The overall funding model 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 strategy which results in an Association’s failure to meet its fiscal responsibility to the membership. Adequately implementing a funding model developed by a reserve analyst will most often 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 BoardsCosts 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 model that fairly assesses reserve contribution dues while remaining stable; requiring membership to pay their fair share over time. Often an allocation rate increase that matches the inflation rate is adequate. 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 5% 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 in any given year may fluctuate wildly over time 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 funding model must allow the Association / Board to be fiscally responsibleThe membership of a community is counting on the Board to make good long-term budgeting decisions. A funding model strategy which, for example, removed reserve funds to pay for a large capital improvement (e.g. construction of a recreation building or swimming pool) 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