Some people have questioned if they shouldy to have a first reserve study conducted. Others have questioned if they shouldy previous reserve study updated.y
wait y
wait to have their Confusion has
been pervasive. Earlier this year an industry publication even suggested, in light of inflationf and economic conditions, not having a reserve study updatedy
for ”several” YEARS! The choice of whenf conducted or updated is collectively yours,y
to have a reserve study and
yours alone as a board. This article will give you some information that will examine what effect current economic conditions have on reserve planning and help you understand the methodology and philosophy behind reserve studies so you can make the best decision for your
yo community. Reserve
Rese d Study Methodologyy
and Philosophynd P A discussion of reservef
study timingy should first
start with an understanding of reserve study philosophy. Why arey
study? Many people believe you conduct a reserve study to predict future expenditures. This is an easy wayy
reserve study, but it is not necessarily correct.
y to explain the purpose of af y
No one can predict what a future board will do. Many future expenditures are somewhat unpredictable. Fundamentally ay
reserve study
determines an equitable amount to collect from current unit owners for the ”consumption of life”f of thef
the reserve fund. Stated differently, a unit owner should pay theiry cost of thef
existingassets. Thatamountshouldgointo fair share of thef
replacement assets they enjoyedy
of ownership.f many ofy thef
y during their time to conducting a reserve study arey
When you realize this distinction, questions, concerns, and objections alleviated. This
concept will be referenced throughout this article as we examine the current economic conditions as they relate
to reserve planning. A few examples of thisf philosophy iny y practice:
An association plans to replace the light fixtures on the exterior of a building. The existing fixtures were developer grade basic fixtures that cost $25.00 per fixture. They have of remainingf
10-years useful life. When the time comes
to replace them, a future board will browse hundreds of light fixtures in a catalog or online and make a selection for the association. New fixtures may bey more high-tech (e.g., Wi- Fi connected lighting with daylight sensing/ motion sensing technology.) Those fixtures may bey
much more functional. They willy 22 | COMMO 22 COMMON IIN NTEREST ® • Winter 2022r also you conducting a reserve
be much moreexpensive! Imagine how high reserve contributions would need tobe if anf association were reserving for what they would actually spendy of whichf
y
would be incredibly high,y existing elements of thef justify they
on all future replacements (many might be upgrades). Association fees but the finishes and association wouldn’t
existing unit owners to pay really highy a condominium is currently 6.5y
higher fees. It wouldn’t be fair to monthly
fees for upgrades that will be made in the future that they mayy
y never enjoy. The average stay iny years. For this
reason, the standard on which a reserve study bases reserve contributions is an assumption of replacement “in like kind” to what exists today. A reserve provider can’t predict the future, but a reserveprovider can assess exactlywhat elements currently existy
y common of which current unit owners are consuming.
currently runningy
Most economic reporting indicates inflation
n isi at about 9%. As many boardsy
who have been obtaining bids for projects are aware, for some projects and some materials, it’s much greater than that. This extraordinary inflation begs the question: How can you predict future expenditures when cost increases are so unpredictable? To answer this question, we will first refer to reserve study philosophyy
in this article. An accurate reserve study doesn’t necessarily tryy
y fromearlier y
y to predict future expenditures.
It determines what a fair contribution to the reserve is for the consumption of life of existingf assets. For this reason,a reserve study doesn’t
y
need to predict actual inflation spikes tobefair and doesn’t need to predict the cost of anf
y cost of consumptionf actual
future project. Over time, inflation will almost certainly return
toan average. In addition, the of existingf
a 30-year time horizon and it’s virtually certain to a historical average. Of course,f
occurring over y
y assets can be
determined today. A reserve provider won’t assume 9% inflation in your study. Keep in mind the predicted expenditures in a reserve study arey not all occurring in 2023, they arey
inflation over that 30-year period will return to very closey
that
begs the question about what expenditures may occur in theshort-term. Your reserve provider should examine very near-term
expenditures to
see if itf would be appropriate to increase those individual cost projections to account for this spike in inflation.
• A Publication of CAI-Illinoisf Chapter
on the property, the life g.
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60 |
Page 61 |
Page 62 |
Page 63 |
Page 64
