When reviewing a reserve study, there is a lot of information to comprehend. Important measures to note are the yearly funding totals and the fee per unit per month. Maybe the most noteworthy number to look at, however, is percent funded. Percent funded is a percentage that measures the overall health of an association.
Percent funded is defined in CAI’s national reserve study standards as the ratio, at a particular point of time (typically the beginning of the Fiscal Year), of the actual (or projected) Reserve Balance to the Fully Funded Balance, expressed as a percentage. What this means is it measures what the association has in reserves compared to what it should have in reserves.
Real World Example
Let’s look more closely at an example of what this means using the following numbers:
|Remaining Useful Life||Useful Life||Replacement Cost||Reserve Funds|
In this example, the roof is 12 years old and currently costs $100,000 to replace, so there should be 12/20ths of $100,000 in reserves (12/20 x $100,000), which is $60,000.
For the painting, it is 4 years old and currently costs $60,000 to replace, so there should be 4/6ths of $60,000 in reserves (4/6 x $60,000), which is $40,000.
Overall, there should be $60,000 (for roofing) + $40,000 (for painting) for $100,000 in reserves. Currently, there is $40,000 for roofing and $30,000 for painting for a total of $70,000. This means that the association has $70,000 when in theory it should have $100,000. This tells us that the association is 70 % funded ($70,000/$100,000).
Health of the Association
The higher that the percent funded is, the healthier the association is. Associations should strive to be around 100% funded. When associations have a lower percent funded, they are much more likely to not be able to pay for a reserve item and end up with a special assessment.
The following are general measures to the health of an association based on the percent funding model:
0-30% funded: poorly funded
30-70% funded: fairly funded
70-100% funded: well funded
100+% funded: very well funded
Percent funded is a way to measure the depreciation of all the reserve items and to see how much of that depreciation has been funded. Funding 100% of the depreciated amount is the ideal amount. Percent funded is also very useful to see where your association stacks up compared to the ideal amount of reserve funding. It can be a wake up call for some associations when they realize that they have a poorly-funded community. As you can see, one simple number goes a long way in determining the current status of reserve items for your association.