1) Financial Analysis
The financial analysis is a funding study that utilizes the physical analysis to determine:
- reserve allocation
- percent funded (general strength indicator)
- cash flow analysis (projection or forecast)
Reserve Allocation is normally determined utilizing the cash flow method (the most flexible) with a threshold funding goal that is established by analysis of the association’s current physical and financial condition. Strategic Reserves has the flexibility to adapt and implement various funding methods and goals based on statutory requirements or individual association preferences. If you have a particular method and/or goal preference, just let us know and we’ll honor your request
Percent Funded is of particular importance, for it provides a general indication of reserve strength. Strategic Reserves interprets this strength indicator in terms of risk associated with the availability of reserves to fund future expenditures. These levels follow:
|Percent Funded||Level of Risk|
|70% and above||LOW|
|31% to 69%||MODERATE|
|30% and below||HIGH|
The cash flow analysis is a projection (or forecast) of anticipated reserve income and disbursements over a timeframe of twenty years minimum (a National Reserve Study
Standard). Association management needs to understand that- the probability for an accurate projection decreases as the timeframe increases and that successful plans must ensure that enough “cushion” is provided to fund the “estimated” reserve disbursements.
Factors considered in the cash flow analysis typically include:
- interest earned on reserve investments (adjusted for any taxes imposed)
- reserve allocation increases to compensate for inflation
- reserve component increases due to inflation
2) Physical Analysis
The physical analysis is a component study of the major common area components (or items) of the association. It consists of:
- component list development
- current cost estimates
- useful life estimates
- remaining life estimates
- field report preparation (condition assessment)
All five (5) elements of the physical analysis play a pivotal role in the success of the long-term reserve funding plan. They are, in essence, the building blocks of the reserve study and form the foundation upon which the financial analysis is built. Inaccurate or incomplete information builds a weak foundation, and results in failure of the long-term reserve funding plan.
3) Reserve Study
The reserve study provides a long-term funding plan necessary to maintain, repair, replace or restore major common area components (such as asphalt pavement, exterior coat/paint/stain, and roofs) in the future. Ideally, all future reserve item expenditures will be covered by those funds currently set aside by association management as reserves. The plan involves the following two elements:
- Physical Analysis (or component study)
- Financial Analysis (or funding study)
The reserve study conveys to owners and potential buyers a more accurate and complete picture of the association’s financial strength and market value. It discloses to buyers, lenders, and others a long-term funding plan specifically designed to offset future reserve expenditures. .
The long-term funding plan requires an annual review and update to allow for the necessary adjustments. Strategic Reserves strongly recommends that a Reserve Study Update be performed annually with a site-visit inspection ‘at least’ every three (3) years to ensure the – Security of a successful plan!