Reserve Studies - The Complete Guide is 436 pages explaining the concepts and process for making a reserve study. For more information and to order, click here.

 

 

Facilities Advisors, Inc.

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Reserve Analysis

 

The term “reserve analysis” is generally understood to encompass the entire reserve study process. The reserve study consists of three separate parts of reserve analysis:

  1. The On-site Physical Analysis
  2. The Component Evaluation
  3. The Financial Analysis

The on-site physical analysis

is critical to both identify and quantify the components to be included in the reserve fund study report. What many in the industry miss is that this process should also identify any components that are EXCLUDED from the reserve study report. As an example, it is not only common practice, but is good practice to exclude some components from the study because their dollar value is so small that they are more appropriately absorbed into the operating budget.

However, any significant components for which the association has maintenance responsibility should either be included in the study or specifically disclosed as being excluded from the study, along with the reason why they are excluded.

The component evaluation

is generally considered as being part of the physical analysis by most reserve preparers. However, it is a separate process that is based on the on-site analysis, and may be performed by different individuals from those that performed the on-site analysis. The component reserve analysis considers the evaluation of condition performed during the on-site analysis, then applies additional procedures of considering maintenance activities to extend the useful life, alternative replacement products, evaluation of remaining life, and cost to replace the component (valuation).

 

We have observed that many reserve analysis fall short in the valuation process. The estimated component replacement cost should include all costs necessary to remove the existing component, and install the replacement component and place it into service. Costs for an identical product can vary widely depending on assumptions used:

  1. Is an outside contractor used to perform he work at a fixed fee?
  2. Is in house staff used to help control costs?
  3. If in house staff are used, are costs charged to the reserve budget? Or the operating budget?
  4. If in house staff are used, are cost allocations based on direct pay rates? Or based on direct pay rates plus an overhead allocation?
  5. Are there disposal costs to consider?
  6. Are there salvage costs to consider?

The financial analysis

is used to determine what assessment levels are necessary to provide a future funding plan. The financial projection is normally a 30 year period. Such a long cycle is generally considered necessary due to the long life spans of certain components included in most reserve studies. The funding plan also includes a number of assumptions:

  1. Projected beginning balance of reserves (which generally is at a future date and can be impacted by a number of factors)
  2. Assumed assessment level
  3. Assumed annual increase in assessments (to offset the impact of inflation on component costs)
  4. Assumed interest earnings
  5. Assumed income tax rates
  6. Assumed inflation rates