RMP: Annual Update Only Takes 10 Minutes?

This is an “Annual 10 Minute Update Solution” for those avoiding the tedious task of initially producing and annually updating a Reserve Management Plan. This solution/method will still produce the needed support for the annual reserve budget and cash flow projections which validate that reserve funds will be available when needed. This method can be applied to wholly-owned as well as vacation ownership/timeshare properties.

First, the difference between a Reserve Study and a Reserve Management Plan must be clarified. A Reserve Study is an independent (arms-length) opinion on the Reserve status of an owner’s association. This is similar to the concept of an independent AICPA audit opinion of an entity. A Reserve Management Plan is not an independent opinion, but incorporates the objectives of the owner association’s board of directors and management to form an overall plan on how to fund reserves.

For example, a Reserve Study would be needed when FHA approval is required for a common-interest-development property in which the owners are pursuing FHA insured re-financing or for potential buyers pursuing a FHA mortgage.

Next, we must ask what is the intent of the Reserve Management Plan? If the objective of the Reserve Management Plan, as determined by the board of directors and management, is only to assure that based upon funding of the reserves that there will be sufficient reserve funds when needed in the future: then the “Annual 10 Minute Update Solution” can be a reality.

How is this possible? The industry norm is to track reserve items as of the analysis date, such as when they will need to be replaced or maintained next, then scheduling based on the estimated useful life. When producing the annual update, all the reserve items that were scheduled to be replaced or maintained in the year (or period) prior to the new analysis date need to be reviewed as to whether they were actually replaced or maintained. If there are reserve items that were replaced or maintained, then they need to be updated for when they will be replaced or maintained next. If there are reserve items that weren’t replaced or maintained as scheduled, they will need to be re-scheduled.

This can be a tedious, time consuming task depending on how many reserve items need to be addressed. But this “Annual 10 Minute Update Solution” method provides much more flexibility with less updating than would normally be needed. Less updating equals less time consuming procedures.

Once again, how is this possible? Imagine a bridge and the task of painting it. It has been determined how long it would take to paint the bridge so that when it is finished it would be time to start over again at the beginning. And this would continue into the future so the bridge was always appropriately painted. Hence, the work would be continuous at a determined cycle from one end to other and then start over again.

The same logic can be applied to reserve items regardless of whether the reserve item was replaced 20% a year on a five year cycle or 100% once every five years, or a derivative as such. The initial Reserve Management Plan would schedule reserve items for when they need to be replaced or maintained next and then scheduled going forth based on the estimated useful life. But when doing the following year updates whether reserve items were replaced or maintained when scheduled, the original schedule would not be changed or adjusted.

If the original objective was to be assured that sufficient funds would be available when needed, then tedious tracking can be avoided. All the reserve items would be set on a repeating cycle. This method’s main objective is to assure that we know what the required current and future contributions should be, and not so concerned about the precise timing of the replacement or maintenance of the reserve items. 

If in general the reserve funds are expended sooner than expected, then potentially the annual contribution would have to be increased proving that sufficient reserve funds will be available when needed through the cash flow projection. On the other hand, if the reserve funds are not being expended sooner but later, then the future annual contributions might not be required to increase as much annually as originally planned.

The only thing pertaining to the reserve items which might need to be updated annually is the current replacement or maintenance cost as of the analysis date. This is a much easier and quicker procedure alone, than also doing the scheduling and re-scheduling of dates.

In reality, how often is the actual scheduling of replacement and maintenance of reserve items in a Reserve Study or Reserve Management Plan followed and implemented? This also gives the board of directors and management the flexibility to determine when and how reserve funds will be expended without having to be held to some finite schedule.

So if this method of analysis is chosen for to determine how a Reserve Management Plan would be produced, what would be the update procedures? As follows:

  • Change or move the analysis date to the following year.
  • Update the beginning reserve fund balance as of the updated analysis date
  • Adjust the rate of inflation, rate of interest earned and the annual percentage increase of the annual contribution as decided*
  • Adjust the first year’s annual contribution as decided*

 * by the board of directors and management

After these procedures have been performed, a cash flow projection would present whether a positive or a planned minimum balance is projected for a selected number of years. If a negative balance is produced at any point in the cash flow projection, the assumptions above would be adjusted until a positive cash flow or planned minimum balance is achieved. These procedures should not take more than 10 minutes.

It is recommended that every few years the timing of the cycle periods should be reviewed for reasonableness.

This method or approach to a Reserve Management Plan might not meet the objectives of some members of the board of directors or management. But this method of Reserve Management Planning might be attractive where there is no existing plan and the thought of completing or updating one annually has been considered overly tedious and time consuming, and not worth the return.

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