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Terms & Definitions

(Note: The following definitions refer to words and phrases as they are used in reserve studies.)

Board of Directors/Body corporate committee

A group of people that oversee the operations of a common-interest community and enforce its rules. The Board is normally composed of homeowners who are elected at the association's annual meeting.

Body Corporate

A legal entity that manages a residential community, including setting and enforcing its rules. All owners within a community are members of its Body Corporate.

Cash flow method

This method of developing a reserve funding plan ensures that contributions to the reserve fund balance the expenditure.

Common area

Areas within residential communities that are owned jointly by all the homeowners.

Common-interest community (CIC)

A residential community area in which some of the property is owned in common.

Component inventory

A list of community-owned components and their characteristics (e.g. replacement cost, age, remaining useful life).

Condition Assessment

Evaluation of the current condition of components, based on observations or reports.

Contingency fund

A portion of the reserve fund that is put aside for unanticipated expenses (e.g. damage to components or unexpected cost increases).

Financial analysis

The portion of a reserve study concerned with assessing the current status of the reserve fund and development of a Recommended funding plan to replace major components over an extended period of time.

Fully funded

100% Funded (i.e. the actual or forecast Reserve balance equals the Fully Funded Balance).

Fully funded balance (FFB)

The total accrued balance of the deteriorated portion of all the common area components.

Used as an indicator against which Actual (or projected) Reserve balance can be compared.

Funding Goals

Basic categories of funding plan goals are as follows:

  • Full Funding: Attaining and maintaining cumulative reserves at or near 100% funded.
  • Baseline Funding: Keeping the reserve cash balance above zero.
  • Threshold Funding: Keeping the reserve balance above a specified dollar or percent funded amount. Depending on the threshold, this may be more or less conservative than full funding.

Funding Principles

The following principles are generally applied:

  • Sufficient Funds When Required
  • Stable Contribution Rate over the Years
  • Evenly Distributed Contributions over the Years
  • Fiscally Responsible

Percent Funded

The ratio of the actual (or projected) Reserve Balance to the Fully Funded Balance, expressed as a percentage.

Physical analysis

Identification of major components, and estimation of their remaining useful life and replacement costs.

Pro forma budget

A planning tool to estimate future expenses and revenues for the coming year, including those impacting the reserve account.

Remaining useful life

The amount of time remaining before a component will need to be repaired or replaced.

Reserve account

An account at a bank or other financial institution, containing funds exclusively intended to pay reserve expenses.

Reserve Balance

Actual or projected funds that the association has identified to cover future repairs or replacement of major components, which the association is obligated to maintain.

Reserve budget

The portion of an association's budget allocated for infrequent major capital repair and or replacement expenses.

Reserve fund

The amount of money earmarked for reserves, usually placed in its own bank account known as the reserve account. Also known as a Sinking fund.

Reserve Plan

An association's plan for contributions to a reserve fund to offset anticipated future expenditures.

Reserve study

A periodic review of the major common area assets, to enable owners to estimate and provide the necessary funding to repair or replace those assets as required.

Sinking fund

The amount of money earmarked for reserves, usually placed in its own bank account known as the reserve account. Also known as a Reserve fund.

Special assessment

An amount of money levied on all homeowners within the community in addition to monthly contributions, in order to meet additional expenses that cannot be met within the community's budgeted funds.