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.
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