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If you’re into reserve funds … as a Board
Member, a
Property Manager, a Reserve Fund Specialist, an
Accountant … we hope you won’t be surprised to learn that
a single expenditure has far-reaching consequences.
Let me explain.
A simple case is that you replaced your condo’s hallway
carpeting. The plan called for its replacement in 2008, but
because of its condition you did the job this year, 2006. The
cost, let’s say $45,000, found its way into your books of
course. But the estimated cost ($35,000) still sits in your
reserve fund plan, in the 2008 column.
Anyone referring to the 2008 plan, unless they’re extra
careful is going to see that cost as “coming up”, instead of
“taken care of”.
We maintain that you should do something to head off wrong
interpretations. And we have a suggestion for what you
should do. We’ll get to that a bit later.
But let’s go on a bit with other meaningful chain effects that
our carpeting replacement is causing.
For one thing, the carpets cost $10,000 more that you
expected them to. If, in your reserve fund plan, you have
carpet replacement costs in there every 8 years, perhaps all
those estimates are low as well. The chances are very good
they are, because your planner was thinking $35,000, not
$45,000.
(By the way, we’re putting aside the inflationary calculation in
this article. The principles are the same, regardless).
So here you are with a plan that shows a replacement cost
of $35,000 several times in the carpeting row of the
spreadsheet, when it should be showing $45,000. Imagine
what that variance is doing to your projected balances. It’s
showing them artificially too high and the error is increasing
as you go through the plan’s span.
There’s more.
Remember, in our example, that the carpet was replaced 2
years sooner than the plan called for. The plan called for an
eight year interval and you replaced it after only six years.
Your plan, however, is showing a carpet replacement cost
occurring every eight years. If you adjusted the plan (as you
should) you’d have the costs occurring every six years.
What a difference it would make to your projected balances
a few years out!
Our point, above, is that a single expenditure from the fund
can, and does, have broad and costly implications.
All right, how do you handle this? In a word, you adjust your
plan as real expenditures occur. You adjust it not only for
the single actual expenditure dollars being different than the
estimate, but you adjust it also for the probability that later,
similar expenditures will resemble the latest expenditure and
not the earlier planned amounts. You also adjust your plan
for the change in intervals if you think the interval in the plan
now looks too long, given your latest experience.
In this short article, we cannot go into the how of making
these adjustments, but we refer you to some software that’s
designed to do the job. Just go to Google and type in —
reserve fund software. See our article on Update Scan Fix,
as well.
You’ll rest easier if you’re “on top” of your property’s
reserve
fund.
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