Reserve Studies Demystified (Part 2 of 4)
Non-Pooling or Pooling? Straight-Line or Cash Flow?
That is the question!
Pooling and non-pooling budget concepts are often misunderstood and misinterpreted. CPAs usually refer to “Straight Line” versus “Cash Flow” models instead.
This is simply the way an association is holding the reserves and more accurately these are two different accounting methods, which can have advantages and disadvantages.
When you are considering options you should consider what best applies to your association. A CPA who specializes in condo and HOA law should ultimately decide.
This blog will explain the differences between the two methods:
Straight-Line or Non-Pooling:
The “straight line” method assigns a funding goal to each component in the reserve budget without regard to the accumulation of funds for other components. It’s like having an individual reserve “account” for each component — roofs, paint, asphalt, etc. The balance in one component “account” cannot be used for another component. The cash in each of these separate “accounts” is compared to the funding requirements of the component the account is for when determining the adequacy of the association’s funding.
For example, when reserves are funded with the straight-line method, the law provides that reserve funds can only be used for their intended purposes. For example, money could not be taken out of the roof reserve account to pay for painting the building.
Cash Flow or Pooling:
The “cash flow” method focuses instead on the total cash available to address pending replacements needs of all components. The cash flow method creates an acceptable cash flow for all anticipated expenses for many years to come (usually at least 30 years) and to annually fund enough money in reserves to cover all the annual expenses no matter in what year they occur.
With pooled reserves it is still necessary to determine for each component the needed reserve amount, the remaining useful life and the estimated replacement cost.
The main difference is that instead of having single “accounts” for each component, the reserves are pooled. With this accounting method, there is no vote of the unit owners required to use funds from one component to cover expenditures of another component, whereas in the straight-line method this vote is required.
Please understand that this information is provided from the perspective of a reserve analyst. For legal or tax advice, please consult your Attorney or CPA.
Stay tuned for the next blog where I will post about the different funding models associations can use . If you do not want to miss it, please sign up to my feed or “Like” my company on Facebook and you will receive the latest blogs.
Related articles: What is a Reserve Study?
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