Reserve Studies Demystified (Blog 4 of 4)
There are several funding models, however, the best funding model for an individual association depends on the tolerance for risk. And risk means simply; if the association will have to levy special assessments or even take on loans to fund reserves which are not adequately covered.
It is strongly recommended to make the decision of which funding model the association uses with the help of a CPA, who is specialized in condo and HOA law. The reserve analyst will assist you in understanding and interpreting the different funding models.
- Current Assessment Funding Model:
This analysis is based on the current annual assessment, parameters, and reserve fund balance. Because it is calculated using the current annual assessment, it will give an accurate projection of how well the association is funded for the next 30 years of planned reserve expenditures.
With a good software the Current Assessment Funding Model (CFM) is completely driven by the user with the settings chosen by the analyst. There are many features included within this model, including the ability to change the contribution in dollar amount or percentage to increase or decrease the contribution every single year throughout the analysis.
- Threshold Funding Model:
This analysis calculates the minimum reserve assessments, with the restriction that the reserve balance is not allowed to go below $0 or another predetermined threshold, during the period of time examined. All funds for planned reserve expenditures will be available on the first day of each fiscal year. The Threshold Funding Model allows the client to choose the level of conservative funding it desires by choosing the threshold dollar amount.
This model is designed to adequately fund all of the components in the reserve budget that need to be replaced in each year. This provides a ‘threshold’ for the funding that could be described as ‘just in time’. It is quite adequate in funding the components as long as no emergencies like weather or fire disasters occur and if items would need to replace items sooner than expected. It is possible to control the level of the ‘threshold’ of the funding with both dollar minimums as well as minimum and maximum percentage of funding.
- Component Funding Model:
This funding model’s long-term objective is to provide a plan to a fully funded reserve position over the longest period of time practical. This is the most conservative funding model.
The object of the Component Funding Model (CFM) is to get the reserve balance to hundred percent as quickly as possible over the longest period practical. It is the most conservative funding model. It will also tend to make your community feel over funded at times – depending on your funding goals.
This concludes the current blog series about Reserve Studies. I hope you enjoyed the read and got some information out of it for your next board meeting!
As always, thank you for reading my blog, if you have any questions, please feel free to contact me via email or phone.
Share this Post