Types of Reserve Fund Studies
There are three categories of reserve fund studies - Class 1, Class 2 and Class 3.
Class 1 - This is the comprehensive reserve fund study with a site visit. It is the first one done and involves a great deal of information gathering to first develop a "component inventory" of those items that have varying and limited "life cycles". Such items as roofs, building cladding, windows, doors, HVAC systems, plumbing & electrical systems, site services, paving, landscaping, etc. are identified and should be quantified.
While the Condominium Act does not require the reserve fund study to provide this quantification, it would be prudent to engage one who does. It is very useful information for you to have. Each component is inspected in order to initially arrive at a professional opinion on its respective stage in its typical "life cycle".
A great deal of information must be assembled as part of the Class 1 reserve fund study. It includes examining blueprints and drawings, examining repair and replacement histories, ongoing maintenance programs, interviewing people with knowledge of historical problems, then calculating current replacement costs. Their future values are projected at an appropriate and compounded inflation rate with the timing of the major repairs and replacements.
This establishes the "benchmark" for future updates and for the 30 year cash flow projection required as a part of the reserve fund study or update. We use the 'sinking fund' method in developing our benchmark analysis. It is much more realistic and accurate than using the typical and simplistic 'straight line' method favoured by architects, engineers and building technologists.
Class 2 - This is the reserve fund study update with a site visit. With this, the component inventory is reviewed and verified, then a condition assessment is conducted of each item (based on visual inspections) and their life cycle costing is updated.
Updated interest and building component inflation rates are applied to the current replacement costs and an updated 30 year cash flow projection is calculated to determine the revised contribution requirements.
While not as extensive as the Class 1 - comprehensive reserve fund study, it nonetheless, does involve a considerable amount of site time. Individual reserve fund inventory components change after 5 to 6 years. They've simply aged and in some cases have been replaced or undergone major repairs. That's why they have to be seen again.
It is done six years or so after the comprehensive reserve fund study and three years after the Class 3 - reserve fund study update without a Site Visit.
When we do Class 2 updates for condominium corporations where previous reserve fund studies have been done by engineering groups and other technologists, we've discovered that many of them do not provide adequate component quantification and unit costing. Nor do they even bother to develop a reserve fund history based on analyzing previous reserve fund expenditures. These are critical elements in a proper and diligent Class 2 update and we take the time, if we find it missing, to provide this valuable information. It's simply a part of our due diligence.
Class 3 - This is the reserve fund study update without a site visit. This is an update of the comprehensive reserve fund study and is primarily a financial update of the annual reserve fund contributions and reserve fund expenditures that have been made (if any). We plot the respective life cycles of each component by generally extending them by the number of years since the last reserve fund study or update with a site visit. Again, revised interest rates and building component inflation rates are applied to the calculations to arrive at a revision of the annual reserve contributions required and a revised 30 year cash flow projection is done.
After the initial comprehensive reserve fund study is conducted (Class 1), the prudent client will commission a Class 3 and Class 2 update, alternating between those two types every 3 years.
These reserve fund study updates are important to do because components get closer to their life cycle period ends (in some cases prematurely) and the interest and building component inflation costs change a great deal. These three factors have a great impact on changes to your reserve fund plan, the component costs, the timing of major repairs and replacements, as well as your annual reserve fund conditions.