What is a “fully funded reserve contribution”?
Most condo boards, managers, and reserve study professionals do not understand that the “fully funded balance” is not directly related to the “contribution rate”, and that the “contribution rate” calculation required by the Washington condominium act has nothing to do with being fully funded.
Just as a company’s balance sheet and income statements measure different things, the fully funded balance and contribution rate measure different things. Fully funded balance is like a liability on a balance sheet. Contribution rate is like an expense on the income statement.
The “fully funded balance” is a snapshot at a specific time of the total (theoretical) amount of depreciation of all the building components in the reserve study. The “percent fully funded” is measured at the same point in time, by comparing the actual reserve account balance at that time against the fully funded balance. It is always expressed as a percentage.
The contribution rate is something that by statute is calculated to prevent the reserve account falling below zero during the 30 year duration of the reserve study period. The fully funded balance could be 10% or 100% at different times during the course of 30 years, and it would not affect the contribution rate.
Most reserve study professionals want you to save more than the bare minimum (as calculated by the “contribution rate”). Most don’t understand that there is no such thing as a “fully funded contribution rate”. If your association is now at 25% funded, you can calculate a contribution rate (different than the “contribution rate” as defined by statute) to achieve a fully funded status at a specific date in the future. You must know the specific date to perform the calculation. The required contribution rate is different to attain fully funded status in 5 years, 10 years, or 30 years.
Because there is so much confusion about the relationship between the fully funded balance and the contribution rate, many “professional” reserve studies do not meet the requirements of the statute, and do not disclose both of those numbers as defined by the statute.
Many “professional” reserve study providers also believe that they know better than every board how to assess owners for reserve expenses. Only the board can make decisions about how much to actually assess owners for reserves, and how those assessments should be timed to meet the needs of the community. If a repair project is not anticipated for many years, the board can reasonably choose to postpone some reserve contributions to a future date to maximize the total collections and help current owners meet their other immediate financial obligations.
The purpose of the reserve study is to inform the owners and buyers about the repairs that will be needed in the future, and how the current reserve balances and budgets for funding will impact them as owners going forward. Whether the association chooses to save more now, or pay more later is a decision that is made by the association, taking into consideration factors that may be beyond the building’s financial needs.
Don’t let a reserve study professional bully you into relinquishing your authority to make decisions for your association.
If you have any questions we can answer, please feel free to leave a comment or contact us directly. We look forward to continuing this conversation with you in our future posts!
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