Understanding the Process of Reserve Management Planning

What is a Reserve Management Plan?

The Reserve Management Plan (RMP) or Reserve Study (RS) is a document that is created for the management company and association of any shared ownership property, such as; resorts, timeshares, fractional properties, condominiums and condo hotels. The RMP establishes a schedule by which funding for maintenance, refurbishment, repair and replacement of common area components are achieved and provides assurance that funding to maintain the property will be available when needed.

Based on the funding needs that are documented in a good RMP or RS, reserve accounts are established and maintained to hold the funds for replacement of assets and any long-term or deferred maintenance that the association is responsible for.

Why have a Reserve Management Plan

It is the fiduciary responsibility of the management company and/or the HOA board members to be proactive in the protection and good management of the shared ownership investment. The RMP offers an invaluable management tool for long range planning and advanced scheduling of major repairs or replacement of components, while providing documentation of good stewardship of the association assets and reserves. Owners are also assured that their investment will be enhanced over time through an equitable and systematic approach to accumulating the replacement reserves.

A quality RMP should be more than a paperweight or expensive door stop. It should be a working document that includes the following elements in a clear, easily understood format:

• Inventory of Components and their estimate useful life

• Estimate remaining useful life of each component

• The current replacement cost for each component

• The future replacement cost for each component

• A funding and reserve summary

• An analysis of the current financial condition of the association

• Funding recommendations and projections for a thirty year schedule

• And any limitations and disclosures

What Type of Study

All studies and evaluations should meet or exceed the established criteria set forth by the Community Associations Institute (CAI) and the American Institute of Certified Public Accountants (AICPA); both have published guidelines which dictate minimum requirements for what constitutes a thorough reserve study.

Level 1 - Full Reserve Plan or Study:

• An onsite physical assessment and analysis of the association's common elements, which includes detailed information regarding the quantity, useful life, remaining life and replacement or repair costs of the components.

• A financial analysis of the current funds and the associations funding practices for future capital expenditures and obligations.

• A reserve funding projection for a thirty year period.

Level 2 - Update Reserve Plan or Study:

• An onsite visit to confirm data and details regarding the quantity, useful life, remaining life and replacement or repair cost of the components.

• An update of the financial analysis of the current reserve study projections for a thirty year period.

Level 3 - Update Reserve Plan or Study:

• No onsite visit is required.

• Review of life and valuations adjustments to the existing inventory, fund status and funding plan based on information provided by the association board.

Level 1 RMP's are typically done every three to five years, with a Level 2 or Level 3 RMP being done annually between Level 1 studies.

What to Expect During the Process

A qualified RMP provider should provide a checklist of documents and information they will need to produce a thorough reserve document.

Certain documents are necessary for the accuracy of and in the preparation of the study or evaluation and should be provided by the management or association, if available. Paper copies or digital copies of the association declarations, covenants and bylaws, inspection reports, engineering studies, vendors list, scaled site plans or construction drawings and a copy of the most recent reserve study, may be requested.

Third party sources such as association vendors or consultants are often used for collecting data about components, timely responses to such requests are necessary to ensure the project completion date is met.

For a Level 1 or Level 2 study, a site visit is performed by an analyst or team. The analyst usually stays on location and will usually be there for three to five days, depending on the size of the property. The more information that is provided by the management or association, the more quickly the site visit can be done.

The analyst documents and photographs the components that will be included in the study, making notes about the age and condition of each. For the hospitality industry, this includes a percentage of the room interiors and FF&E. The analyst inspects the interiors of a minimum of 10% of the units within the resort property; to include a representation of each type of unit on the property. An assumption is then made that this represents the other units with regards to condition and content with quantities to be determined by inventory record review when possible.

Upon completion of the site visit, the analyst will compile the collected data and prepare the study document, based on the desired refurbishment schedules. Software is used to calculate the financial data and produce a thirty year projection and summary. This phase of the process usually take thirty to sixty days, depending on the documentation provided, the amount of information requested and timely responses by management or the association.

A conscientious analyst will offer a draft, for the management and association to review, prior to finalizing the document. This gives them the opportunity to request any changes or add a component that might have been overlooked. The analyst should be available for a phone consultation to answer questions and encourage open communication during the entire process.

After any changes have been made to the draft, a final document is produced. Be aware that most RMP providers will have a time limit on the draft phase, if changes are not requested within that time frame the draft information becomes final and the document is produced.

The final RMP document should include full color photos and any necessary narrative, on each component. Some providers will also include a digital version of the study, so additional copies can be made for management and association board members.

Report in Hand

The final reserve document should be a valuable tool that is used to create financial stability and help maintain investment values.

A good reserve analyst team will be an ongoing resource for management and the association long after the report is completed, helping them to understand the process of Reserve Management Planning.