Capital Reserve Fund

The Capital Reserve Fund Analysis and Report

The New State Law

In 2002, the Virginia state legislature passed a new law that requires property owners associations to accumulate a capital reserve fund to pay for maintenance, repair, and replacement of the association's capital assets. In HGCA's case, capital assets include such things as all asphalt and concrete pavements, tot lots, tables and benches, retaining walls, and storm drainage structures. The new law also requires that property owners associations conduct a reserve study at least once every five years to determine the amount of reserve funds necessary to accomplish this. Click: to see the text of the applicable state law.

Board contracts for Reserve Study

In December 2002, the Board contracted with Mason & Mason, Capital Reserve Analysts, Inc. to perform the required reserve study. Mason & Mason conducted an assessment of the condition of HGCA's capital assets during February 2003, and following a review and comment cycle, submitted the final version of the study and report to the Board in July 2003.

The Study's Impact

In September 2003, the Board began its review of the potential impact of the report on the budget for 2004 and beyond. The study recommended an annual contribution of $25,000 to the reserves, but after further review of Mason & Mason's financial models, analysis and findings, the Board felt that an annual contribution of $20,000 was sufficient to maintain the recommended level of funding. This level of annual contributions to the reserve fund is still two to three times the amount that we have traditionally added to the fund, and there are a number of reasons behind this.

What's Changed

In previous years, the Board has followed a replace-upon-failure philosophy; i.e., wait until a capital asset fails or becomes seriously degraded, and then repair or replace it. In the new Reserve Study the underlying philosophy is to establish an estimated life expectancy for each asset, and then replace the asset when it reaches the end of that time, regardless of its condition. Because physical assets may fail or deteriorate either faster or slower than expected, the study represents only a best estimate of when an asset must be replaced. Therefore, in accordance with state law, the Reserve Fund Study must be reviewed and updated annually, and then repeated at least once every five years. Adjustments to the Study's financial models are to be made annually to compensate for actual activities and expenses occurring in the previous year with regard to the capital assets covered by the plan.

Prior to 2003, the Association considered only the Cluster's asphalt and concrete pavements as capital assets for which maintenance and replacement needed to be financed through capital reserve funding. All other physical assets such as the tot lots and retaining walls were repaired or replaced only as needed, and only when the year's budgeted operating funds permitted. Those funds were available only in years when there were limited demands on the operating funds such as with a mild winter (i.e., not much snow removal expense) or a year with few storms (i.e., only limited tree maintenance costs). As noted above in the first paragraph, the new Reserve Study considers our other physical assets including the tot lots, tables and benches, retaining walls, and storm drainage structures to be capital assets. Therefore, the Reserve Study includes Reserve Fund coverage for these assets in addition to the pavement assets that have been traditionally covered in prior years.

The Board's Implementation

When the Board of Directors received Mason & Mason's final version of the report in July, the Board felt that changes needed to be made to the Study's financial models before the Study was implemented by the Association.

The Study Report's financial models were baselined at the beginning of 2003. Since 2003 was half over, the Board changed the baseline to 2004.
The Study Report's financial models began with the Reserve Fund balance as it was at the end of 2002. In concert with the changed baseline, the Board changed the models to reflect the estimated Reserve Fund balance at the end of 2003.
The Study Report called for an annual contribution $25,000 to the Reserve Fund in 2003 and 2004. The Board changed the models to provide for an annual contribution of $20,000 in 2004, the first year in the Board's revision.

The Board made the modifications to the Study's financial models only after verifying that the underlying principles in maintaining adequate funding to adhere to the Study's asset replacement schedule was not compromised.

Reviewing the Study Models

So homeowners and residents can review and compare Mason & Mason's final version of their Study Report to the revision produced by the Board for actual implementation, both are being made available below as Adobe PDF files. To keep the document sizes reasonable for efficient web retrieval, the Study's photographs, covers, and section separator pages have been removed from the two versions. If any homeowner or resident wishes to see the full Mason & Mason Study Report in its entirety, complete with all pages that were omitted from the version below, send an e-mail to the Board of Directors by . The Board will provide you with a printed copy, or an electronic version as an Adobe PDF file (49 MB!) on CD-ROM.