RES02.0 - Reserve Fund - Main elements of the Report - Part 1
Our example condo, Tiny Townhouses has a conveniently small inventory list due to it’s small size an rather simple structure. Lets go through the columns from left to right.
Category – As we discussed in the “Capital Items, Not Operating” section above, the is where each and every item of common property of a capital nature that requires replacement in the future is listed. It bears repeating again, items listed here must be of a capital nature, not operating expenses. This list can be quite short for smaller developments such as a 3 unit townhouse complex, whereas a 50 story residential tower will have a much much larger inventory of components to list here. This is certainly where having a qualified and experience person to prepare your report pays off – missing an inventory item here can have serious consequences on future funding of repairs.
Total Replacement or Repair Cost – Again, based on the experience and knowledge of the preparer, each item in the inventory is assigned a cost to replace. This amount should correspond to a market price to replace the item. It’s important to note that this cost is in today’s dollars (ie 2014, assuming it’s the year 2014 when the report is written). Inflation into the future will be taken into consideration later on in the “Funding Schedule”. Amounts should be inclusive of taxes and any other charges or permits required. If expenditures re-occur over a number of years, the amount in this column is the total of all reoccurring periods.
Number of Expenditure Periods – amounts that are re-occurring can be factored in by this column. A recurring expenditure that happens once every 5 years can be listed here as ‘5’. (since it’s a 25 year report)
Expenditure Cost Per Period – this would be for the amount spent per period of occurrence. Using the above example, an expenditure that happened once every 5 years at a cost of $2,000 per occurrence would have $2,000 here.
Expected Life – this column states and estimate of how long the item, brand new, would last after it is installed.
Actual Age – is what it implies. How many years has an element of common property been installed and used? Quite often, best guesses will have to be taken as to actual ages of property items, particularly in older buildings where the people or property managers involved when the item was originally installed are long gone.
Effective Age – ah… here where things get interesting. Based on a visual inspection of the item, the appraiser will make an estimate of how long a particular piece of the common property will last based on the current age and condition of the item. A wood fence may have an expected life of 25 years, but if it’s been kept in good, dry conditions, despite the actual age of the fence of 10 years, the Preparer may deem the fence to be in such good condition that the fence should be treated as if it was only 5 years old. They would then put a 5 in this column. If the item was aging exactly how it was expected to, the number in this column would be the same as the actual age.
Remaining Life – this is simple. This is your Expected Life less the Effective age. When this gets low enough to be zero, the reserve fund effectively mandates that it be service or replaced.
2) Table of Annual Expenditures
Excellent – now that our Inventory of *what* has to be fixed is set, the next thing to do is to map out *when* all those items will have to be done. Specifically, what years will all those things have to be done? It’s especially important to know if many items will need to be done in a single year as sufficient cash will have to be on hand to address that need. To track all of this, there will typically be a schedule that looks similar to the below, a “Table of Annual Expenditures”.
Lets look at the Table of Annual Expenditures for Tiny Townhouses:
In the example above for Tiny Townhouses, you can see all of the items from the previous Inventory of Common Property listed down the 1st column of the table. For each one of these items, the expenditure required to replace it is assigned to a year according to the Remaining Life column of the Inventory of Common Property. Note that the year is relative to the year 2013, when the Reserve Fund Report was compiled.
For instance, lets look at the “Driveway Replacement” item. On the Inventory it has a remaining life of 10 years. As the report was done early in the year 2012, the $12,000 replacement would be scheduled to be done in the year 2022. However, you can see that there are also deck repairs scheduled to be done that year, as well as $500 of driveway maintenance making this a very expensive year, potentially draining the reserve fund.
Where possible the expenditures should try and be staggered so that too many expenditures do not happen in a single year, particularly if the reserve fund is just starting out or does not have much in the way of funds previously saved up. Consider small “maintenance” expenditures where possible to give yourself a bit more time to space out major expenditures.
(continued on Part 2 of Reserve Fund: Main Elements of the Report)