Stone
Mountain Corporation
Re$erve StudiesSM
Re$erve StudiesSM |
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EXECUTIVE SUMMARYThe Executive Summary at the beginning of the reserve study provides an overview of the results of the reserve study. Because different associations prefer different analysis methods, we offer both cash flow analysis and straight-line depreciation reserve funding plans. Following is a sample Executive Summary from our reserve study (Copyright © 1991- 2003 Stone Mountain Corporation):
Executive
Summary for Litigation
Estates HOA
Litigation
Estates Homeowners Association is a common interest realty
association having 40
units and 48
identified reserve components to maintain.
This is a Planned Unit Development of townhomes on 9.1 landscaped acres. The reserve analysis results are summarized as follows: 1. A Thirty-Year Cash Flow Analysis assuming continuation of present reserve funding levels indicates your association will begin to have a reserve deficit in the year 2015 when projected reserve expenses exceed the projected reserve balance. 2. The Optimized 30-Year Cash Flow Analysis funding plan indicates that your association should consider raising reserve funding to $45,458 per year – followed by cost-of-living increases thereafter – to adequately build reserves for future expenses. 3.
The Straight-Line Depreciation
Analysis indicates that Litigation
Estates Homeowners Association has cash reserves representing 18.3%
of depreciation of reserve component assets.
This percent-funded estimate
indicates your association is underfunded
for depreciation-to-date. Tabulated results of the cash flow analysis and straight-line depreciation are shown in the Reserve Analysis Summary Sheet following this section. This single-page summary may be used for distribution to members of your association. CASH FLOW
ANALYSIS: Projection Showing
Current Funding Levels In order to demonstrate what would happen if the
association continues reserve funding at current levels, a simple cash flow
projection with projected income and projected inflation-adjusted future reserve
expenses shows the minimum resulting reserve balance for the 30-year projection
is <$405,434>,
occurring in the year 2032.
The projection assumes a reserve funding level in fiscal year 2005 of $32,886
($32,500
annual reserve contribution plus $386
interest on reserves after taxes). Continuation of current reserve funding levels (increased at the rate of inflation hereafter) will cause your association to be underfunded as shown in the graph following the optimized cash flow projection. For the complete graphic depiction of future expenses versus reserves, refer to the graphs in this report. CASH FLOW
ANALYSIS: Optimal Reserve Funding
Projection The optimal reserve funding cash flow projection suggests
that an annual reserve contribution of $45,458,
with annual cost-of-living increases thereafter, should provide adequate
reserves for the duration of the projection, barring unforeseen circumstances,
and subject to the summary of assumptions documented herein.
It is assumed that interest earned will be accrued directly
to the reserve account, hence the recommended reserve funding level is exclusive of earned interest. The
recommendations are as follows:
For some underfunded associations, the rate of funding increases in subsequent years must exceed standard cost of living increases in order to restore reserves to a healthy level. For the complete optimized cash flow projection and graphic depiction of future expenses versus reserves, refer to the cash flow section in this report. STRAIGHT-LINE
DEPRECIATION ANALYSIS The straight-line depreciation analysis indicates that your
association is 18.3%
funded. The percent funded
estimate is the ratio of your $52,540
reserve balance versus the $286,560
life-to-date depreciation of your
reserve components. The percent
funded estimate is most often used as a measure of strength
of reserves relative to depreciation of assets. The life-to-date-depreciation of your reserve components is
also referred to as the “Fully-Funded
Balance” because if your association has that amount of reserves at this
point in time, the association would be considered to be 100% funded. If your association would like to be 100% funded in the
next fiscal year, it must make a FY 2005 reserve contribution of $41,275,
or $3,440
per month, plus it must fund any remaining “Unfunded Depreciation
Liability” (refer to the following Reserve
Analysis Summary Sheet). For most associations, to be 100% funded requires
substantial sums of money. Many associations that are not 100% funded are able
to adequately fund future reserve expenses using the optimized cash flow
analysis funding plan which more realistically includes interest earnings on
reserves. As long as the
association is 100% funded in the most costly year of the 30-year cash flow
projection, their funding plan is adequate.
RESERVE ANALYSIS SUMMARY SHEETFor your annual budget letter it is convenient to have a single-page summary of the results of your reserve study which includes the some of the required disclosures such as the percent-funded estimate and whether or not a special assessment or reserve funding increase will be necessary. Following is an example of our Reserve Analysis Summary Sheet:
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