Reserve Studies Demystified (Blog 3 of 4)
Ideal Reserves vs. Fully Funded
My clients frequently ask me, “What really are ideal reserves and what does it mean when a component is fully funded”? I’ve compiled an example in this post whereby you will see that “ideal reserves” and “fully funded” actually mean the same thing.
Ideal Reserves are explained using a mathematical calculation, which is easy to understand by everybody:
Age of the component
______________________ X Current Replacement Cost
Let’s calculate an example and let’s assume we have a 10-year old roof, which has a life expectancy (useful life) of 30 years. The roof is covered with barrel tiles and the current replacement cost is $45,000 (that is the approximate cost for a 4,000 SF property)
________ X $45,000 = $15,000
This means, if the association has currently $15,000 in their reserves for the roof, they have “ideal reserves” in place.
Fully funded does pretty much the same calculation, just backwards:
We know the roof currently costs $45,000, divided by the useful life of 30 years, times the current age:
$45,000 / 30 years = $1,500 times 10 years = $15,000
There you go, ideal reserves and fully funded means exactly the same thing and are the best and most conservative way to have your reserves calculated. If you have any comments or questions, I’d enjoy hearing from you!
The next topic of this series I will talk about the different funding models associations can use.
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