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3 Ways To Leverage The Reserve Fund Study

The most valuable resource that the Board of Directors can access is the Reserve Fund Study. Prepared by an engineering firm once every three years, this highlights the many major physical projects that the corporation will be part of for the next 30 years. It outlines items that will be replaced in buildings, when those replacements are needed, and an estimated cost. But the most important aspect this document reveals is how much money should be allocated to the Reserve Fund account in order to make these changes possible.

Through a Reserve Fund Study, Board members can plan months or years in advance on numerous projects and make key decisions now. This allows the Board of Directors to be proactive and avoid having to make last-minute decisions or be blindsided by problems that could have been prevented. Breakdowns and problems are expected to happen regardless of this plan; however, a good Reserve Fund Study will allow maintenance fees to remain low overall, benefiting the owners of the condominium, and the corporation.

When preparing a good Reserve Fund Study, it is a good idea to incorporate engineering and financial planning elements. The plan should cover the necessary repairs and replacements while being realistic and easy to follow. Bringing the engineering group to work alongside the Board or Management Company will be a huge advantage. This is on top of focusing on these three areas.

Interest Rates

The assumed interest rate is a crucial consideration in financial planning. The condominium only provides two revenue streams after all – the maintenance fees from each unit, and the interest in the account those fees go into. As a result, interest plays a significant portion in revenue over the years. This might not be the case with smaller firms, but interest soars the more money that is in that account in the end.

As a result, when speculating the interest rate, it’s important to never exaggerate the interest rate. Even though it’s impossible to predict what the interest rate will be in 10 or 20 years now, making educated predictions is better than wildly guessing.

This same philosophy also applies to the inflation rate. Every year it goes up and keeping it accurate as possible is key. Big projects are planned based on these numbers after all.

The Expense Curve

It is very common for replacement demands to be noted on the Reserve Fund Study solely based on the expected life. For example, a boiler might be up for replacement because it’s expected to last 20 years. However, with good maintenance and inspections, that boiler could be good for another five or 10 years.

Basing items on life expectancy can be a slippery slope as it results in spikes of planned expenditures before dropping down the next year. It results in shaky expenses and a shakier Reserve Fund which can struggle to keep up. The best course of action is to have an expense curve as level as possible, excluding rising costs due to inflation.

Achieving that “balance” is a matter of smoothing out those items. Running maintenance and replacing a few items here and there can help in flattening the curve. This rule does not apply to important items like boilers or water pumps but aesthetic items, structure projects and machinery too.

The goal is to avoid having those expense spikes as the only way to smooth those over is to raise maintenance fees. Having spikes in those maintenance fees to cover each spike is a poor strategy to have. By smoothing out expenses and planning in advance, owners will be able to pay for the costs evenly without any problems, even if they just moved in.

Timing Aesthetic Projects

The Reserve Fund Study covers every major project, and aesthetic projects are no exception. Even though the structural and mechanical function is important, aesthetic projects serve as the glue to keep the value stable and growing. These projects make the condominiums look good and appeal to potential buyers. Good plans will spread the number of projects out across multiple sectors. In terms of aesthetics, upgrading them once every few years is a good policy to have.

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