Reserve Management: Not the Nightmare Everyone Thinks It Is

While the Vacation Ownership industry has changed and matured over the past generation, a majority of the industry is unaware that the task of reserve management is no longer the expensive or tedious task that it once was.

To refresh everyone’s memory, reserve management deals with the tracking of common area and unit interior reserve items for determining the reserve contribution to be included in the annual maintenance fee paid by owners/members. This assures that reserve funds will be available when needed for renovations, long term maintenance and replacement of reserve items, keeping the property as close as possible to its original condition.

Advancement in software technology has changed practically everything we do including Vacation Ownership reserve management which has been predominately viewed as a time consuming task with little return.

Reserve management has come a long way in the last generation:

  • Reserve management software has become Internet based
  • “Scoping” data methods have been developed for efficiency
  • New expedient methods for initiating data and updating data are available
  • Budgeting time for reserves has decreased from weeks/months to hours/days
  • In-house reserve management surpasses third party reserve study reports
  • Third party reserve studies once costing $15,000 are now approximately $5,000

In-house reserve management plan software costs for a 200 unit property can be as little as $0.10 per interval member/owner for the initial year and pennies for the following years ($1,000 per property software cost / 10,000 intervals (200 units x 50 owners) = $0.10).

Third party reserve study costs for a 200 unit property can be as little as $0.50 per interval member/owner for the initial year and pennies in the following years ($5,000 reserve study cost / 10,000 intervals (200 units x 50 owners) = $0.50).

These are small costs per interval member/owner for producing an effective reserve management plan that will assure the quality of their Vacation Ownership into the future.

A third party reserve study presents only the results of the analysis as of the beginning of the property’s calendar or fiscal year when it is done. If it is coupled with reserve management software it becomes an ongoing living analysis for different “what if” scenarios, following years analyses and annual budgeting. The combination of third party reserve study report and reserve management software will give property General Managers the ability to properly account for the reserve management function.

With the maturing legacy resorts and resale issues, a reserve management plan has become a more integral part of addressing these problems. The financial position and condition of a Vacation Ownership property cannot be determined without reserve management analysis. Tired and aging properties trying to redeem their original stature must assess the current condition of the common areas and unit interiors to address the issues.

Once the reserve management analysis has determined the condition of the common areas and unit interiors, a reserve management financial plan can address timing and scheduling of renovations and various funding options. Funding options might need to include increases in the maintenance fee reserve contribution, borrowing from financial institutions, special assessments, or a combination of the three.

So what information and data needs to be accumulated to produce a useful Reserve Management Plan?

  • Plat map (with detail of buildings/floors/unit numbers and related model types)
  • Model floor plans (including masters, lock-offs, ADA’s, etc.)
  • Inventory by room for each model floor plan (with costs, estimated useful life and the last time the reserve items were renovated, replaced or maintained)

Based upon the individual room inventories, the individual reserve items need to be organized by cost and their expected estimated useful life. Historically, all the individual reserve items in a unit model were tracked separately. This would sometimes include as many as some 300 individual reserve items per unit model. Tracking a $45 lamp would take just as much time as tracking a $1,800 refrigerator. This is why “scoping” the data is necessary and the 80-20 rule is applied.

Tracking 80% of the individual reserve items that represent 20% of the total reserve item costs can be grouped together and reserved for in a budgeted amount by room. The other 20% of the reserve items which represent the other 80% of the total reserve item costs would be tracked separately. So instead of tracking some 300 reserve items individually, now only an approximate combination of some 40 individual grouped budgeted amounts and individual reserve items would be tracked. This would decrease the amount of time for tracking and ongoing updating of a reserve management plan by more than 80%.

Once the reserve items are grouped and the individually tracked reserve items costs have been determined; renovations, maintenance and/or replacement can be scheduled. With this information and data the reserve management financial plan can be produced.

Based upon the scheduled reserve item’s timing for renovations, maintenance and/or replacement, the reserve management financial plan via a cash flow projection, will determine what the contribution amount to the reserve funds needs to be in the maintenance fees. The financial plan should consider inflation, interest earned and annual increases of the initial year’s contribution amount. The cash flow projection will begin based upon the reserve management plan analysis date and the amount of reserve funds on hand at that time. The reserve fund contribution will be determined by the assumptions of inflation, interest earned and annual increases that provide for a positive cash flow projection for the desired number of years.  

With the accumulated information and data, and up front planning, the exercise of producing a reserve management plan’s unit interiors can be decreased by 80%, decreasing the amount of time and effort for producing annual updates.

If the expertise is not at hand for determining costs, estimated useful lives and the next scheduled renovations, maintenance and/or replacement, then it is recommended to contact a vacation ownership reserve professional who can assist in accumulating and producing this information and data.

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