“You are not defined by your past. You are prepared by your past”
Reserve Fund – Whether we are property owners, property managers or REALTOR®, we are always re-aligning our past, our present and our future
Here are five reasons why it is in the best interest of these three stakeholders for a Reserve Fund Study (a.k.a. Depreciation Report or a Capital Plan) to be updated periodically (typically every three years).
Reserve Fund – To Test Assumptions
It’s an inescapable reality that any report that makes forecasts about the future will include some assumptions. In a depreciation report there are two types of assumptions: Physical assumptions about the service lives of assets and quality of maintenance; and Financial assumptions, such as inflation rates and interest rates. One of the primary objectives of an update report is to review these earlier assumptions and, wherever possible, to shorten the list of assumptions by eliminating or adjusting those that are no longer valid.
- The Owner gets a more credible report
- The Manager gets more accurate estimates for capital projects
- The Realtor gets due diligence for the seller
And …an example how: Due to market pricing at the time, an initial Depreciation Report included a high estimate to replace the roof. Recognizing the changes in construction pricing, the updated report reflects a decrease in roofing costs.
Reserve Fund – To Measure Progress
Many people consider a depreciation report to be a form of report card indicating the health of the building and the owners’ level of preparedness for the future. An update report will reflect the positive work that has been completed in the interim three year period. Successive reports reveal the progress made over time.
- The Owner gets an impartial representation of their building
- The Manager gets a clearer sense of the upcoming workload
- The Realtor gets a sense of the performance of the investment
An example of how: A heating boiler is replaced two years after the initial depreciation report. The age of that significant asset is set back to zero. The new and improved boiler is given a 25 year service life whereas the old boiler had only been able to provide 15 years of service.
Reserve Fund – To Support Decisions
By observing the changing conditions and trends over the three year period, reserve planners are able to gain further insight into the ongoing performance of the different assets. This additional information helps owners evaluate risks and make more appropriate decisions.
- The Owner gets an actionable report
- The Manager gets facilitated decisions at general meetings
- The Realtor gets a more comfortable buyer.
And an example: A plumbing inspection completed in the years after an initial depreciation report finds that the pipes are more robust than originally anticipated, thereby postponing an expensive plumbing project by five years.
Reserve Fund – To Plan Wisely
The building is now three years older than it was at the time of the initial study. Therefore, the 30-year planning window needs to be adjusted to capture the next three years that were initially “beyond-the-horizon”.
- The Owner gets a meaningful report.
- The Manager gets a road map for the future
- The Realtor gets disclosure of future costs for the buyers’ benefit
And… here is an example: The owners are alerted to a new project that was not included in the original report. With this new information, they adjust their reserve contribution so as to mitigate financial hardship down the road.
Reserve Fund – To Achieve Peace of Mind
By updating the report every three years, the owners can achieve greater certainty about their future and thereby satisfy their duty of care and facilitate ongoing disclosure requirements. They can implement the plan to protect their investment.
- The Owner gets empowerment.
- The Manager gets a more stable community
- The Realtor gets confidence in the risk mitigation program
Changing circumstances and financial contexts require ongoing realignment. The stakeholders should be careful not to get complacent. The significance of each update cycle will depend on several factors, including:
- The age of the building;
- The number of capital projects completed in the interim three year period;
- The emergence of any problems with any of the assets;
- The quality of maintenance performed on the building over the years.
Some closing questions — Has your building and your plan improved over the last three years and do you want buyers in the open market to know this? If your building has not improved, what can you do to get on the right track?
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David Albrice is a Senior Building Asset Management Specialist at RDH Building Engineering Ltd. He has participated in the preparation of almost 1,000 capital plans / reserve studies / depreciation reports over the past 10+ years. David can be followed on Twitter.
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