Posted:
Here is the article I wrote for our newsletter:
Replacement Reserve Studies: An Explanation
By XXXXXX, Finance Committee Chairman
What is a replacement reserve study? What does it cover and how is it used?
The Association owns a great many assets including the Clubhouse and all of its associated facilities, all of its furnishings and equipment, and all of the community infrastructure such as roads, sidewalks, ponds, retaining walls, etc. As a member of the Association, you share in this ownership.
Over time, many of these assets will wear out and need to be replaced. Some will need to be replaced in just a few years, and some will serve us well for many decades. In any case, how do we ensure that the Association will have sufficient funds set aside to cover these replacement costs when they occur?
Virginia law requires associations to perform a replacement reserve study for this purpose at least every five years. Replacement reserve studies are generally performed by a professional engineering firm that specializes in such studies. Our most recent study was completed in August 2011 by the firm of Miller Dodson Associates and is now posted on the Association website.
The steps taken in performing the study are:
1. Develop a complete inventory of all common elements based on plans, drawings, and an on-site visit.
2. During the on-site visit, visually inspect and determine the current condition of all elements of the inventory.
3. Based on industry standards and engineering experience, determine the “Normal Useful Life” and Remaining Useful Life” of each element.
4. Develop an estimate of the replacement cost of each element.
5. Summarize the costs of items projected to be replaced in each succeeding year.
6. Provide for a margin of error by developing a “Minimum Recommended Balance” at the end of each year.
7. Based on the current level of replacement reserve funding, calculate the ongoing level of annual contributions to the reserves from the Association members’ monthly assessments.
The study document, which is posted on the Association website, lists an inventory of 218 items, each with its associated number of units’ (e.g., sq. ft.) normal useful life, remaining useful life, and estimated replacement costs. It shows the projected replacement costs, by inventory item, in each of the next 30 years. Finally, it shows the amount calculated as the annual contribution to the reserves from the operating account to cover the anticipated replacement expenses.
The Finance Committee and the Board used the reserve contribution amount in the most recent study as the starting point for budgeting the reserve contribution for the coming year. For 2012, the operating budget calls for approximately $42 (or 20%) of your $220 monthly assessment to be contributed to the replacement reserve fund.
Following this disciplined process of reserving these funds for future replacement expenses helps to insure that you will not face a large special assessment when a big-ticket item, such as the Clubhouse roof, needs to be replaced. It is also important for prospective buyers to know that the replacement reserves are adequately funded.