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Financial Analysis
Reserve Data Analysis
est. 1983
www.rdanorthwest.com
About Reserve Data Analysis
Since 1983 we have provided thousands of thorough and well thought
out catered reserve studies...
Component Analysis Topics
2
3
4
Funding Plan Options & Principles1
Goals of the Funding Plans
Interest & Inflationary Fact...
Component Analysis is the Foundation
Reserve
Study
Financial
Analysis
Component Analysis
The Financial Analysis is based o...
Process - The Reserve Study
Step 1 Step 2 Step
4
Step
3
Component
Analysis
Financial
Analysis
Develop
Financial
Strategy
C...
Funding Plans – What Are They?
A Funding Plan is the long term
projections of expenses, needed
reserves and recommendation...
Funding Plan Principles
Sufficient
Cash
Stable
Contribution
Rate
Evenly
Distributed
Fiscally
Responsible
Does the financia...
Washington State Statutes
WA State RCW 64.34.382 – Reserve Study - Contents
(i) A recommended reserve account contribution...
Goals of the Different Funding Plans
Statutory (*Threshold)
•A percentage or dollar
amount requires by State
Law.
•Usually...
Funding Goals– Risk Tolerance
K
S
• Funding plans that require
lower reserve balances and
allocation rates carry
higher ri...
Funding Plan Goal – Finding the Best
Fit for the Association
What’s the
Best Fit
The funding plan(s) provided in the
Reser...
Interest & Inflation Data
Interest is based on the
Client provided information
with respects to their bank or
investment a...
Impact of Interest & Inflation
Interest
Earned
• Inflation has a much greater
impact on the funding plan as
it impacts the...
Interest vs Inflation - Example
Reserve Account Balance: $100,000 Replacement Costs : $1,000,000
1% Interest Earned / yr. ...
Offsetting Inflation
I D E A
• Offset the impacts of
inflation with regular annual
increases to the reserve
account contri...
Develop a Financial Strategy
Forecasting
• Determine Future Costs
• Determine Future Replacement Cycles
Review
Accounts
• ...
Considerations for the Recommended
Funding Plan
Does the funding plan follow principles outlined in National
Reserve Study...
L
A
I
Considerations for Special
Assessments
A S S S S
C
M E N TE
P
S
• Planning to utilize special assessments for
expect...
Numerous Funding Plans Provided
There are many funding strategies to consider but typically only a few will be
appropriate...
Funding Plan - Developed
The Recommended Funding Plan will guide the community towards a
higher “Percent Funded” while bei...
Minimize Reserve Contributions
Properly Maintain Components
Complete maintenance of components on schedule to maximize the...
Avoid These Common Mistakes to
Prevent Missing the Target
1. Relying on loans first – typically loan will cost double the ...
Do you have
any questions?
??Joel L Tax, PRA
Professional Reserve Analyst
Ph: 866-574-5115 ext. 704
jtax@rdanorthwest.com
...
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Reserve Study - Financial Analysis

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The approaches, concepts and funding methods considered during the financial analysis phase of developing a reserve study for a common interest community.

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Reserve Study - Financial Analysis

  1. 1. Financial Analysis Reserve Data Analysis est. 1983 www.rdanorthwest.com
  2. 2. About Reserve Data Analysis Since 1983 we have provided thousands of thorough and well thought out catered reserve studies and have offices through the US.
  3. 3. Component Analysis Topics 2 3 4 Funding Plan Options & Principles1 Goals of the Funding Plans Interest & Inflationary Factors Developing a Financial Strategy 5 Minimizing Reserve Contribution & Common Mistakes
  4. 4. Component Analysis is the Foundation Reserve Study Financial Analysis Component Analysis The Financial Analysis is based on the completed Component Analysis. All Funding Plans developed during this phase of the reserve study process are based on the projected expenses of the common area components.
  5. 5. Process - The Reserve Study Step 1 Step 2 Step 4 Step 3 Component Analysis Financial Analysis Develop Financial Strategy Completed Reserve Study Developing a reserve study report requires numerous important steps.
  6. 6. Funding Plans – What Are They? A Funding Plan is the long term projections of expenses, needed reserves and recommendations to adequately prepare an Association for common area repair & replacement costs. An adequate Funding Plan will guide an Association to a path of fiscal responsibility. The goals of a Funding Plan can be driven by the Client, Statutory Requirements or National Reserve Study Standards.
  7. 7. Funding Plan Principles Sufficient Cash Stable Contribution Rate Evenly Distributed Fiscally Responsible Does the financial strategy follow the four basic principles outlined in National Reserve Study Standards (CAI).
  8. 8. Washington State Statutes WA State RCW 64.34.382 – Reserve Study - Contents (i) A recommended reserve account contribution rate, a contribution rate for a full funding plan to achieve one hundred percent fully funded reserves by the end of the thirty-year study period, a baseline funding plan to maintain the reserve balance above zero throughout the thirty-year study period without special assessments, and a contribution rate recommended by a reserve study professional;
  9. 9. Goals of the Different Funding Plans Statutory (*Threshold) •A percentage or dollar amount requires by State Law. •Usually bare minimum reserve allocation rate Association (*Threshold) •Developed with specific Association Goals in mind •May include special assessments, loans, periods of high or low reserve allocation rate Component Method •Based on Full Funding Goal •Requires allocation to each component •Typically higher reserve contribution but low risk •Not flexible and time consuming Recommended •Reach a full funding level within a time frame (usually 30 yrs) •Stable reserve contributions rate with stable increases annually. •Fairness to membership Baseline •Keep reserve account above $0 in the time period covered in the study. •Lower contributions but higher risk for special assessment Full Funding •Maintain a 100% Fully Funded Balance •High reserve contribution rate but low risk for reliance on special assessments. *Threshold – Any predetermined $ or % figure
  10. 10. Funding Goals– Risk Tolerance K S • Funding plans that require lower reserve balances and allocation rates carry higher risk for special assessments and loans. • Plans that require a higher reserve balance and allocation rate have a low risk for special assessments, loans and litigation. • This risk level is calculated in the Reserve Study using a barometer known as “Percent Funded” where 100% is ideal but rarely achieved.
  11. 11. Funding Plan Goal – Finding the Best Fit for the Association What’s the Best Fit The funding plan(s) provided in the Reserve Study will take into account the specific goals, risk levels and characteristics of the community. Determining what is the “best fit” is the objective of the reserve study professional.
  12. 12. Interest & Inflation Data Interest is based on the Client provided information with respects to their bank or investment account interest rate as well as historical averages. Inflation rate is based on historical averages and cost manuals. We have great data in the construction industry going back over 100 years! Taxes are also factored into the interest earned. 15% - 30% is typical for most communities.
  13. 13. Impact of Interest & Inflation Interest Earned • Inflation has a much greater impact on the funding plan as it impacts the total replacement costs of all the components. • Interest is only earned on the actual dollar amount in the reserve account and while beneficial has much less impact. • **Ignoring inflationary factors is a common reason communities find themselves at poor funding levels. 3% inflation equals a doubling of costs every 24.5 years. Impact of Inflation
  14. 14. Interest vs Inflation - Example Reserve Account Balance: $100,000 Replacement Costs : $1,000,000 1% Interest Earned / yr. 3% Inflation / yr. = $1,000 Earned - Positive Impact = $30,000 Additional Funding Needs – Negative Impact
  15. 15. Offsetting Inflation I D E A • Offset the impacts of inflation with regular annual increases to the reserve account contribution rate. • This typically requires a regular increase to the HOA dues. Annually would be most fair to the current and future members of the community.
  16. 16. Develop a Financial Strategy Forecasting • Determine Future Costs • Determine Future Replacement Cycles Review Accounts • Review Reserve Account Balance(s) • Review Reserve Account Allocation Rates • Assessments, Loans, High Rate of Delinquent Dues, Etc. Financial Strength • Determine Current & Future Reserve Fund Strength (Percent Funded) • Is it adequate? Is it in line with the Association’s risk tolerance?
  17. 17. Considerations for the Recommended Funding Plan Does the funding plan follow principles outlined in National Reserve Study Standards (CAI) Is the funding plan fair to the current and future membership of the community. Can the funding plan be implemented without reliance on special assessments and loans. Does the funding plan adhere to Statutory Requirements
  18. 18. L A I Considerations for Special Assessments A S S S S C M E N TE P S • Planning to utilize special assessments for expected costs goes again National Reserve Study Standards • Special Assessments penalize future members for past members lack of planning and not paying their fair share to the reserve account • Special assessments have their place – typically emergency funding for unexpected costs.
  19. 19. Numerous Funding Plans Provided There are many funding strategies to consider but typically only a few will be appropriate for the community and included in the Reserve Study.
  20. 20. Funding Plan - Developed The Recommended Funding Plan will guide the community towards a higher “Percent Funded” while being realistic and fiscally responsible.
  21. 21. Minimize Reserve Contributions Properly Maintain Components Complete maintenance of components on schedule to maximize the useful life of the common area components. This could include asphalt sealcoating , clearing out the gutters, annual roof inspection & repair, touch up paint between larger paint cycles and carpet cleaning. A longer component useful life equals less deterioration to the component annually and a lower corresponding reserve contribution will be necessary. No Double Dipping Review the budget to make sure the Association is not paying for items out of the operating account and setting aside reserves in the reserve account for the same project. This is considered double dipping and is not appropriate or fair to the membership of the community. An items should either be a reserve component or be paid from the operating budget, not both. Interest Bearing Bank Account Open a reserve account which maximizes bank account interest rates. As the reserve account grow to more significant levels consider investing a portion in very low risk government back securities. Utilize the Cash Flow Method. This Cash Flow method is appropriate for most communities and allows the funding balance to increase more gradually while keeping reserve contributions lower than a more conservative Component (Straight-line) method.
  22. 22. Avoid These Common Mistakes to Prevent Missing the Target 1. Relying on loans first – typically loan will cost double the amount of adequate planning or special assessing. After a loan the community will be in the position of paying off a loan debt and trying to improve their funding level. 2. Deferring replacement & repair projects – costs go up with time and the deferred maintenance of the project may lead to much larger problems to other components. Additionally the marketability of homes in the community is reduced as Buyers are very wary of communities with deferred maintenance issues. 3. Incorrectly correlating the percent funded barometer in the reserve study with the reserve contribution rate. Depositing 50% of the recommended reserve contribution rate does not equate to a 50% funded level over time. Communities that do so will deplete the reserve account balance in a short period of time. 4. Doing Nothing! Deterioration to common areas works against a reserve budget 24/7 – 365 days a year. The expenditures will happen whether a community plans for them or not. The most responsible, cheapest and fair ways to deal with them is to adequately plan for them years in advance.
  23. 23. Do you have any questions? ??Joel L Tax, PRA Professional Reserve Analyst Ph: 866-574-5115 ext. 704 jtax@rdanorthwest.com Learn more at www.rdanorthwest.com

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