Resources

Terms and Definitions

Every term you will encounter during your quest for reserve knowledge can be found below, in alphabetical order.

100% Funded – see Fully Funded Balance (FFB), located in “Component Identification Report”.

Basis Cost – the estimated unit (of measurement basis) replacement cost.

Cash Flow Method – a method of developing a reserve funding plan where contributions to the reserve fund are designed to offset the variable annual expenditures from the reserve fund.  Different reserve funding plans are tested against the anticipated schedule of reserve expenses until the desired funding goal is achieved.

Contingency Fund – typically 3.0% to 5.0% of annual reserve allocation may be established to pay for incidental and miscellaneous reserve expenditures (optional).

Current Replacement Cost (estimated) – the total estimated cost of a component’s replacement or long-term maintenance action at the time of the study. This amount is calculated by multiplying the measurement basis quantity times the basis cost.

Davis-Stirling Common Interest Development Act – the name for the sections of the California Civil Code (1350 through 1376) that are the framework for the operation and management of common interest developments in California.

Fully Funded Balance (FFB) – total accrued depreciation.  This number is calculated for each reserve component, then summed together for a total dollar value.

Expressed as FFB = (Current Replacement Cost) x (Estimated Used Life) / (Estimated Full Life)

Full Life (estimated) – the original estimate of a period of time that a component will last before major long-term maintenance or replacement is required.

Funding Goals – there are four basic categories of funding plan goals:

Þ    Baseline Funding – establishing a reserve-funding goal of keeping the reserve cash balance above zero.

Þ    Full Funding – setting a reserve-funding goal of attaining and maintaining reserves at or near 100% funded.

Þ    Statutory Funding – establishing a reserve-funding goal of setting aside the specific minimum amount of reserves required by local statutes.

Þ    Threshold Funding – establishing a reserve-funding goal of keeping the reserve balance above a specified dollar or percent funded amount.

Future Replacement Cost (estimated) – the current replacement cost multiplied by an inflation factor (compounded annually).

Level I Reserve Study – is considered a full study, it consists of:

Þ    Component Inventory – quantification and verification of the reserve components.

Þ    Condition Assessment – the task of evaluating the current condition of the component based on observed or reported conditions.

Þ    Life and Valuation Estimates – the task of estimating Full Life, Remaining Life and repair and replacement costs for the components.

Þ    Fund Status – status of the reserve fund as compared to an established benchmark such as percent funding.

Þ    Funding Plan – an Association’s plan to provide income to the reserve fund to offset anticipated expenditures from that fund.

Level II Reserve Study – is considered an update (on-site) study, it consists of:

Þ    Component Inventory – verification of the reserve components only, no quantification.

Þ    Condition Assessment – the task of evaluating the current condition of the component based on observed or reported conditions.

Þ    Life and Valuation Estimates – the task of estimating Full Life, Remaining Life and repair and replacement costs for the components.

Þ    Fund Status – status of the reserve fund as compared to an established benchmark such as percent funding.

Þ    Funding Plan – an Association’s plan to provide income to the reserve fund to offset anticipated expenditures from that fund.

Level III Reserve Study – is considered a financial update, it consists of:

Þ    Life and Valuation Estimates – the task of estimating Full Life, Remaining Life and repair and replacement costs for the components.

Þ    Fund Status – status of the reserve fund as compared to an established benchmark such as percent funding.

Þ    Funding Plan – an Association’s plan to provide income to the reserve fund to offset anticipated expenditures from that fund.

Measurement Basis – the unit of measurement, i.e.: each, linear feet, square feet, squares (100 sf).

Percent Funded – the ratio, at a particular point of time, of the actual (or projected) Reserve Balance to the Fully Funded Balance, expressed as a percentage.

Remaining Life (estimated) – an educated evaluation of the amount of time before the component will need replacement.

Reserve Allocation – money that is collected and applied to particular components (see Year 2011 Reserve Budget).

Reserve Component – is defined as any major component that needs major maintenance or replacement at a frequency exceeding two years but typically not more than 30 years.

Reserve Fund Balance (estimated) – the estimated amount of money in the reserve account(s) as of the study date, typically calculated by adding the prior year’s current reserve balance, remaining reserve allocations, and interest, and then subtracting any known reserve expenditures through the same prior year.

Reserve Study – is a budget-planning tool that identifies the current status of the reserve fund and offers a stable and equitable funding plan to offset the anticipated future major common area expenditures.  It consists of two parts:

Þ    Financial Analysis – the portion of the reserve study where the current status of the reserves (Fund Status) are measured as cash or percent funded and a recommended reserve contribution rate (Funding Plan) are derived, and the projected reserve income and expense over time is presented.

Þ    Physical Analysis – the portion of the reserve study where the Component Inventory, Condition Assessment, and Life and Valuation Estimate tasks are performed.

Straight Line Allocation (Annual) – from the “Component Identification Report” is a single year’s 100% funded amount, often referred to as the ideal or recommended funding level.

Weighted Average Life (WAL) – is calculated by multiplying the cost of each component by the number of months until replacement, creating a weighted average life factor.  The total of the factors is divided by the total replacement cost, producing the WAL.