This article aims to explain, at a high-level, how the Report Cards produced within the Toolkit can help Condominium Corporations avoid unnecessary special assessments.
Future Funding, which is shared with Condominium Owners through a Notice of Future Funding document, refers to the projected funding requirements needed to support the Reserve Fund. A Reserve Fund study is typically obtained by a Condominium Corporation every three years. A Reserve Fund study is produced by an engineering firm that is expected to evaluate the life expectancy and the future cost of replacement of every item owned by the Corporation.
The Function of our Toolkit
Not all Reserve Fund studies are created equal. Depending on the views of the engineering firm and the rate assumptions agreed upon by the Board and the engineering firm, the projected values can differ greatly.
Our Toolkit is able to accurately simulate many typical management styles and thousands of stress test scenarios to build an accurate assessment of you current Reserve Fund study projections. Reserve Fund studies that fail the majority of stress test simulations should be a cause for alarm.
Viewing Assessments
Our Toolkit allows Condominium Corporations view assessments of their past and current Reserve Fund studies. We call our assessments, Report Cards, and our scores are built from analyzing various aspects of the information within the submitted Reserve Fund study and also from simulating thousands of stress test scenarios.
Our Toolkit Report Cards can help identify Reserve Funds studies that may not robust enough to address the needs of your Corporation.
Our Toolkit Report Cards will also highlight when aggressive rate assumptions are being used within a Reserve Fund study. Accepting extreme assumptions for future rates that are highly beneficial for the Corporation is never a good practice. Any process that has financial implications should always use conservative assumptions and unbiased projections.
Establishing a Benchmark
In a typical Reserve Fund study, the closing balance indicates the estimated value of the Reserve Fund at any given time in the future. It is also important to understand that in typical Reserve Fund studies, investment income is calculated with certain assumptions that can be a little inaccurate in practice.
Our calculation engine can simulate a typical management style with conservative assumptions in order to create an accurate forecast for the Reserve Fund to be used as a benchmark. Some immediate differences can be noticeable when:
the system incorporates current investments
interest rate assumption move up within the Reserve Fund study
inflation rate assumption move within the Reserve Fund study
While differences between the input Reserve Fund study and the computed benchmark may exist, the system will use the benchmark as a baseline for any comparisons against other forecasts.
Assessment Details
A Report Card will typically consist of a single score between 0 and 100. Sub scores are also given to about four categories that can help the viewer narrow in on specific issues.
In addition to numeric scores, a list of detailed notes are also available for any Report Card. The list has notes that identify specific issues like the use of problematic rate assumptions. The list also has notes that can help the viewer identify the most common year where the Reserve fund fails.
By knowing the point where the current Reserve Fund fails among many stress tests, a Board can entertain potential solutions to effectively mitigate a failure in the Reserve Fund. A unexpected failure in the Reserve Fund will almost certainly result in an unexpected special assessment. Special assessments have many negative implications for a Corporation. Special assessments can be an effective tool to address a serious situation, but are almost always perceived as a response to poor management.
Summary
Our Toolkit can help Condominium Corporations discover potential issues with their Reserve Fund studies. Detecting issues early can allow Corporations to mitigate issues before they become unmanageable and ultimately cost Owners. While Report Cards can provide clear assessments and details to address, any concerning information should always be a catalyst for conversations with relevant external partners.
Comments