LYLEWOOD GLEN TOWNHOME ASSOCIATION Carver, Minnesota

Transcription

1 LYLEWOOD GLEN TOWNHOME ASSOCIATION Carver, Minnesota RDA REPORT - RESERVE ANALYSIS FOR FISCAL YEAR 2015 RESERVE DATA ANALYSIS, INC. MPLS (612) TOLL FREE (866) FULL RESERVE STUDY REPORT VERSION 001

2 RESERVE DATA ANALYSIS, INC. Midwest Regional Headquarters 1409 Osborne Road NE, Minneapolis, Minnesota Metro Metro Fax November 3, 2014 Mr. Terry Maass, Portfolio Director Lylewood Glen Townhomes c/o Gassen Company 6438 City West Parkway Eden Prairie, Minnesota Analyst Summation Reserve Study Report for Fiscal Year 2015 Dear Mr. Maass: Enclosed is the completed RDA REPORT, Version 001, for Lylewood Glen Townhomes for the fiscal year beginning January 1, This report compares three primary funding plans and includes a functional Excel Spreadsheet for Directed Cash Flow (DCF) modeling. The DCF spreadsheet allows you to make on-the-fly adjustments to your plan or test unlimited alternate funding scenarios against the scheduled expenditures. Each funding scenario is predicated on a cost-inflation factor of 3% and.9% interest earnings--subject to an average 30% tax obligation. The interest earnings stated in the report are net of taxation. FUNDING ADVISORY While the governing documents specifically exclude (from the Association s maintenance obligations) Sidewalks, Stoops, and Driveways, the association is maintaining these components and we have included funding for them in this report at the client s request. See: Article III Section 1 of the Declaration. FINANCIAL STRENGTH OF THE ASSOCIATION: The association s financial health is weak and declining. Only about 7% of the accrued asset deterioration is actually funded by reserve savings, leaving 93% of the association s total reserve liability unfunded. Further, the current rate of reserve savings is simply not sufficient to fund the anticipated expenditures. Cash flow projections suggest the association will incur annual cash deficits by 2026 and will experience more than $4 million in overall shortages by about The current financial trajectory leads to deferred maintenance, declining property values and financial hardship for many owners usually in the form of special assessments, loan payments, foreclosures... We urge the board to take swift corrective action. The association requires greater reserve savings to fund the accruing liabilities and major expenditures. The board of directors should: 1) Disclose the current Reserve condition to owners & prospective buyers. 2) Establish/confirm a means-of-funding policy for each component. 3) Select a funding goal (Full, Baseline, etc.) for association reserves. 4) Implement a workable funding-scenario (budget) to achieve the goal. 5) Prepare and distribute a summary/disclosure document to owners and buyers. Page 1 of 5

3 RESERVE DATA ANALYSIS, INC. Minneapolis, Minnesota THE COMPARATIVE ANALYSIS: Your RDA Report update compares three primary funding-scenarios. Summarized below, each strategy is explained in more detail beginning on page 1-5 of this report. In accordance with National Reserve Study Standards, these three funding plans are generally restricted to 3% (inflationary) annual contribution increases, thereby providing for an equitable distribution of reserve-funding burden among current and future owners: Current Funding (2014 funding rate, CFS) Full Funding (Segregated Component Funding, RDA) Baseline Funding (Cash Flow Minimum, CFM) CURRENT FUNDING (CFS): $5.85 per-unit (average) monthly, 2014 rate. This analysis simply projects the likely outcome of your current funding rate based solely upon the expenditures scheduled in the report, assuming future 3% annual contribution increases beginning January 1, The risk of cash deficit is a virtual certainty for the expenses scheduled in this report. Pages 2-3 and 2-12 provide a summary and 30-year projection. The projections illustrate the inadequacy of the current funding rate ($5.85 per-unit average, monthly); rendering cash deficits no later than 2021 with a peak projected shortfall of more than $4 million by 2043 ($74, average per-unit). FULL FUNDING (RDA Method): $ per-unit (average) monthly; $ increase. This funding plan calculates the savings needed for your reserve components separately, over their respective remaining lives. It projects to accumulate, by 2033, reserve-savings directly proportionate to the total accrued depreciation for all of the components funded by reserves in this report. This plan projects to be sufficient to achieve full funding of accrued depreciation (for all components funded in the analysis) while providing an equitable distribution of financial burden between current and future owners. It presents the lowest risk of cash deficit of all the funding scenarios presented in this report. Pages 2-1 and 2-10 provide a summary and 30-year projection. Based on separate funding calculations for each component over their respective estimated remaining lives, the 2015 monthly contribution to reserves required under this method is $ average per-unit, monthly. This is $ average per-unit monthly, higher than the current rate. Though considered the most conservative of official funding strategies, we are aware of no statutory mandate to fund to this high level. BASELINE FUNDING (CFM method): $ per-unit (average) monthly; $ increase. The goal of this funding plan is simply to maintain a positive reserve-fund cash-balance, avoiding deficits, while increasing contributions an inflationary amount of 3% annually. This plan projects to be minimally sufficient to meet the expenditures scheduled in the analysis while providing an equitable distribution of financial burden between current and future owners. The Baseline scenario is designed to accumulate funds by the end of 2037 that are just sufficient to cover the projected expenditures of This scenario presents a higher risk of cash deficit (especially in the event of premature component failure or higher-than-projected costs through about 2038) than the Full Funding scenario, for the expenses scheduled in this report. Page 2 of 5

4 RESERVE DATA ANALYSIS, INC. Minneapolis, Minnesota Pages 2-2 and 2-11 provide a summary and 30-year projection. The 2015 monthly contribution to reserves required under this method is $ average per-unit monthly. This plan projects to be sufficient to meet the expenditures scheduled in the analysis while providing an equitable distribution of financial burden between current and future owners. This is $ average per-unit, monthly, higher than the current rate. The four graphs following page 2-12 illustrate the projected performance of the three primary plans over a 30-year period. DIRECTED CASH FLOW (DCF) MODELING EXAMPLE INCREMENTAL UNDERFUNDING RECOVERY SCENARIO: In addition to the comparative analysis outlined above, we have prepared a Directed Cash Flow modeling spreadsheet that you will find at the end of the financial summaries section. The example funding-scenario presented here is not limited to inflationary annual increases and does not distribute the financial burden in an equitable manner among current and future owners. The annual contribution rate under this scenario is lower than the Baseline rate through 2025, but higher for fiscal years 2026 through However, it does provide for incremental reserve underfunding recovery while reducing the larger initial contribution otherwise required for conventional Baseline Funding, as detailed above. Rather than an immediate $ per-unit monthly increase in 2015, this schedule includes a funding increase of only $21.25 per unit monthly for fiscal years 2015 through 2031, 3% annual increases 2032 through fiscal 2038; a 50% DECREASE in 2039, and 3% annual increases thereafter. This plan distributes the burden of underfunding recovery among both current and future owners, albeit future owners (2026 through 2038) will bear a greater burden than owners will during the period 2015 through We are providing you an electronic version of the DCF spreadsheet, with interest estimating formulae, which you may use to make on-the-fly adjustments to your plan or test unlimited alternative funding scenarios, perhaps even including any planned future special assessments or loan payment schedules. The spreadsheet includes several columns used to document the means of funding each component's expense. It serves as an aid to note the association's funding policy for each component. Reserve funding policies must fulfill both statutory and governing document requirements. In addition, specific disclosures regarding reserves and other funding means are required of all common interest communities by Minnesota Statute 515B Detailed funding policies will help the association satisfy Annual Report and Resale Disclosure requirements, and manage owner expectations. Page 3 of 5

5 RESERVE DATA ANALYSIS, INC. Minneapolis, Minnesota Where any uncertainty exists, we advise the association to obtain a legal review and written opinion of the legitimacy of their funding policies, as stipulated or permitted under your Declaration and Minnesota statutes. As these are legal questions, we recommend use of an experienced real property attorney specializing in association law. We suggest you then prepare a document similar in design to our sample Funding Matrix (in the appendix) to facilitate distribution of information required in both your Annual Report and your Resale Disclosure Certificates. Should the association adopt a reserve funding-plan such as the Full Funding, Baseline or example Directed Cash Flow model we have presented, you might consider including a statement in your Resale Disclosure Certificates, such as: "The association has commissioned a professional Reserve Study which meets or exceeds the National Study Standards of The Community Associations Institute, Christ Church, VA ( the Association of Professional Reserve Analysts ( and the American Institute of Certified Public Accountants. A credentialed Reserve Analyst from Reserve Data Analysis, Inc. performed the analysis. The findings indicate the current reserve funding-plan, which requires specified annual contribution increases, is sufficient to meet the association's long-term maintenance and replacement obligations as detailed in the study. The reserve study report is available for review upon request from the association." Your RDA REPORT is presented in five parts: Part 1 User Guide: Includes a Table of Contents and offers an easy-to-understand introduction to reserve budgeting and terminology along with a guide to your reserve analysis study. Part 2 Financial Summaries: Includes a Reserve Component Funding Summary, Funding Plan Summaries & Projections, a Distribution of Accumulated Reserves report, a Fund Status Report, a Component Summary by Category Listing, color charts, an Annual Expenditure Schedule (lists future expenses in future costs) and the DCF spreadsheet of the example alternatefunding scenario we prepared for your consideration. Part 3 Detail Reports: Includes detailed information for each component included in your report together with a detail report index. The data on these sheets is the foundation for all financial calculations & projections. Part 4 Photos: Includes color photos collected during our on-site inventory or review of the property. Part 5 Appendix: Includes supplementary information: a copy of the Minnesota Common Interest Ownership Act, a sample maintenance and funding matrix, a reserve study updateworksheet and a Minnesota Resale Disclosure Certificate form. Page 4 of 5

6 RESERVE DATA ANALYSIS, INC. Minneapolis, Minnesota MEET AND REVIEW We hope that you find our report format both informative and useful. Our services include a meeting with the board to discuss the results of the study and review the report & revision process. Please call to schedule this meeting with your board. (In my experience these meetings usually take 1-1/2 to 2 hours more time than is usually available in a regular board meeting.) Please review each of the 37 Component Detail Reports. An index is on page Please also review the report parameters (interest yield, tax rate on earnings) on summary pages 2-1 thru 2-3. Note any desired revisions on their respective pages and forward them to us. Please be advised the Directed Cash Flow Modeling Spreadsheet is an auxiliary tool prepared and supplied for your use and does not supply sufficient data for purposes of revising your RDA Report. Please note any revisions on their respective Component Detail Report pages (noted above). When your revised report is prepared, we will export your adjusted data and prepare a corresponding new spreadsheet for your continued use. All of us at RDA have enjoyed serving you and providing Lylewood Glen Townhomes with the most detailed, comprehensive and useful reserve analysis study available. I wish you the greatest success in maintaining your facilities and protecting the property values in your community. Thank you, Jonathan R. Pettersen, RS Reserve Specialist Page 5 of 5

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24 RESERVE COMPONENT FUNDING SUMMARY REPORT Lylewood Glen Townhomes Carver, Minnesota 57 units Based upon the reserve study prepared for the fiscal year beginning January 1, 2015 the Reserve Component Assessment plan is not sufficient to meet the expenditures projected for the next 30 years. *Based on 3% Annual Reserve Contribution Increases. SEE DISCLOSURE BELOW. First Year of Projected Cash Deficit Amount of Shortfall Average Cost Per Unit 2021 $6, $ Year of Peak Projected Cash Deficit Amount of Shortfall Average Cost Per Unit 2043 $4,245, $74, Note: If assessments vary by unit, the assessment applicable to a specific unit must accompany this document when included as part of a resale disclosure BUDGETED RESERVE COMPONENT ASSESSMENT: Annual Amount Annual Per Unit (Average) Monthly Per Unit (Average) $3, $70.17 $5.85 Note: If assessments vary by unit, the assessment applicable to a specific unit must accompany this document when included as part of a resale disclosure. RESERVE FUND STATUS CALCULATED FOR JANUARY 1, 2015: A) *Fully Funded Balance (total accrued depreciation) for Reserve Components $612, B) Reserve Fund Beginning Balance: (funded depreciation liability) $42, C) Percent of depreciation funded. Line B divided by line A. 7% D) Total unfunded depreciation liability. Line A minus line B. $570, E) Average owner's unfunded depreciation liability. Line D divided by # of units. $10, *Fully Funded Balance: Effective Age of Component Estimated Useful Life X Current Replacement Cost, summed for all components. The following issues, if not disclosed, would cause a distortion of the association's condition: *While governing documents specifically exclude (from the Association s maintenance obligations) Sidewalks, Stoops, and Driveways, the association is maintaining these components and we have included funding for them in this report at the client s request. See: Article III Section 1 of the Declaration. *Our analysis indicates that annual reserve contribution increases of $21.25 Per Unit (Monthly) through fiscal year 2031, 3% increases through 2038, 50% DECREASE in 2039, and 3% annual increases thereafter, project to be sufficient to meet the expenditures as detailed herein. See the example DCF Underfunding Recovery spreadsheet included with this report. This plan distributes the burden of underfunding recovery among both current and future owners, albeit future owners will bear a disproportionately higher burden, particularly from 2026 through Jonathan R. Pettersen 10/31/2014 Reserve Data Analysis, Inc. Signature credentials Date NOTE: The financial representations set forth in this summary are based on information provided by the association and the best estimates of the preparer at the time the summary was prepared. The estimates are subject to change. A copy of the full reserve study report is available for review from the association upon request.

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46 A B C D E F G H I J K L M N O P Q R S T U V W X Y Z AA AB AC AD AE AF AG AH AI AJ AK AL AM AN AO AP AQ AR AS AT Lylewood Glen Townhomes Means by Which Funding is Provided DCF Directed Cash Flow Modeling Example Copyright Reserve Data Analysis, Inc. (Minneapolis, MN) PROHIBITED USE: License of use is granted solely to the originally contracted client. You may not make, use, copy, merge, transfer, sublicense, loan, lease, sell, or rent copies of this spreadsheet, documentation, or any part Report Date: 10/31/2014 All Rights Reserved. Single User License, Per Contract. thereof, to a third party, for any purpose other than serving the needs of the contracted client. If you have received a copy of this spreadsheet without contracted license of use, contact our offices for information on obtaining your Reserve Funding to Funding to be Funding by other Expense Special Expense charged to Reserve Funding Version Basis: 001 Toll Free , Minneapolis , own license. All Rights Reserved and Owned by Reserve Data Analysis, Inc. Minneapolis, Minnesota. begin when Funding to accrue in included in annual means: Specified Assessed among all benefited unit(s) assessed only to Cost Inflation: 3% remaining life is 30 Reserve Budget. Operating Budget. below. units when incurred. when incurred. benefited unit(s). years or less. EXPENDITURE DETAIL Asset Placed in Useful Adjust Remain Maintenance, repair & replacement is direct unit owner responsibility. Description ID Service Life Life X Access Lane - Chipcoat, 3/8"-1/2" / $1, $2, $2, $2, $3, Gov. Doc's X Driveways - Slurry Seal, ALL / $6, $7, $7, $8, $9, $10, $11, $12, $13, $14, X Access Lane - Overlay / $28, X Access Lane - Reconstruction / X Access Lane - Section Failure / $3, $6, Gov. Doc's X Driveways - Replacement, / $83, Gov. Doc's X Driveways - Replacement, / $76, Gov. Doc's X Driveways - Section Failure, / $9, $17, Gov. Doc's X Driveways - Section Failure, / $9, $16, Gov. Doc's X Sidewalks - Single Story, / $4, Gov. Doc's X Sidewalks - Single Story, / $2, Gov. Doc's X Sidewalks - Walk Out, / $8, Gov. Doc's X Sidewalks - Walk Out, / $8, Gov. Doc's X Stoops - Single Story, / $3, Gov. Doc's X Stoops - Single Story, / Gov. Doc's X Stoops - Walk Out, / $27, Gov. Doc's X Stoops - Walk Out, / X Roofs - Laminated, / $523, X Roofs - Laminated, / $468, X Paint - Doors, Jambs, Columns, ALL / $12, $13, $14, $15, $17, $18, $20, $22, $24, $26, X Columns & Beams - Replace, / $64, X Columns & Beams - Replace, / X Gutters - Single Story, / $20, X Gutters - Single Story, / $12, X Gutters - Walk Out, / $39, X Gutters - Walk Out, / $41, X Siding - Stone Veneer, / $280, X Siding - Stone Veneer, / $251, X Siding - Vinyl, Single Story, / $246, X Siding - Vinyl, Single Story, / $151, X Siding - Vinyl, Walk Out, / $581, X Siding - Vinyl, Walk Out, / $613, X Soffit/Fascia - Prefin. Metal, / $263, X Soffit/Fascia - Prefin. Metal, / $236, X Mailboxes - Pedestal Sets / $18, $28, X Lighting - Street / $18, X Sewer - Lateral Line Replacement / One-Time Loan Origination and Legal Review Fees Interest Only Loan Payments Amortized Loan Payments * MAKE ADDITIONS OR DELETIONS OF ROWS ABOVE THIS LINE IN ORDER TO MAINTAIN PROPER FORMULA REFERENCES! ONLY ROWS ABOVE THIS LINE WILL BE CALCULATED IN THE EXPENDITURE FORMULAS BELOW! * Specific disclosures regarding reserves and other funding means are required by Minnesota Statute 515B Detailed funding policies and distribution of a funding matrix will help the association satisfy disclosure requirements and manage owner expectations. Reserve funding policies must satisfy both statutory and governing document requirements. To ensure the validity of your policies, if uncertainty exists, we recommend the client obtain verification from a real estate attorney specializing in community association law. A written legal opinion is preferred. A formal reserve funding policy resolution can then be drafted, adopted by the board and permanently preserved, together with the legal opinion. Fiscal Year Beginning: 01/01/ Projection Summary: BEGINNING RESERVE BALANCE $42, $54, $61, $109, $164, $229, $322, $404, $510, $639, $784, $938, $1,010, $1,200, $1,377, $1,608, $1,845, $108, $368, $549, $804, $1,092, $1,326, $1,612, $135, $277, $410, $480, $637, $772, Yr Total Expenditures Expenditures Projected for Fiscal Year (detailed above) $6, $27, $0.00 $7, $13, $0.00 $26, $16, $9, $8, $15, $112, $9, $38, $0.00 $10, $1,988, $0.00 $87, $23, $0.00 $65, $22, $1,786, $13, $28, $96, $14, $43, $0.00 $4,470, Funding Status as of Fiscal Year Start Date $36, $27, $61, $101, $151, $229, $296, $387, $501, $631, $769, $826, $1,000, $1,162, $1,377, $1,598, $142, $108, $280, $525, $804, $1,027, $1,303, $174, $121, $249, $314, $465, $594, $772, Member Contributions Member Contributions Projected for Reserves $3, Special Assessment Proceeds $18, $33, $47, $62, $76, $91, $105, $120, $134, $149, $163, $178, $192, $207, $222, $236, $251, $258, $266, $274, $282, $291, $299, $308, $154, $159, $163, $168, $173, $179, $5,272, Loan Proceeds Total Net Interest Earnings Net Projected Interest Earnings Contributions Interest: 0.90% Taxes: 30% $ $ $ $ $1, $1, $2, $2, $3, $4, $5, $5, $6, $7, $9, $10, $ $1, $2, $4, $5, $7, $9, $ $1, $1, $2, $3, $4, $5, $112, % Cost Inflation: 3.00% Fiscal Year Projected ENDING RESERVE BALANCE $54, $61, $109, $164, $229, $322, $404, $510, $639, $784, $938, $1,010, $1,200, $1,377, $1,608, $1,845, $108, $368, $549, $804, $1,092, $1,326, $1,612, $135, $277, $410, $480, $637, $772, $956, Accrued Depreciation 12/31/2044 Critical Point Critical Point $3,047, Number of Units Depreciation Funded 12/31/2044 Average per unit monthly contribution $5.85 $27.10 $48.35 $69.60 $90.85 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ % Member Contribution Dollar Amount Increase/Decrease from previous year $21.25 $21.25 $21.25 $21.25 $21.25 $21.25 $21.25 $21.25 $21.25 $21.25 $21.25 $21.25 $21.25 $21.25 $21.25 $21.25 $21.25 $11.01 $11.34 $11.68 $12.03 $12.40 $12.77 $ $ $6.77 $6.98 $7.18 $7.40 $7.62 Member Contribution Percentage Increase/Decrease from previous year % 78.42% 43.95% 30.53% 23.39% 18.96% 15.94% 13.75% 12.08% 10.78% 9.73% 8.87% 8.15% 7.53% 7.01% 6.55% 6.14% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% % 3.00% 3.00% 3.00% 3.00% 3.00% Accrued Depreciation 01/01/ $612, Average Per Unit Total Annual Reserve Assessment $70.17 $ $ $ $1, $1, $1, $1, $2, $2, $2, $2, $3, $3, $3, $3, $4, $4, $4, $4, $4, $4, $5, $5, $5, $2, $2, $2, $2, $3, $3, Depreciation Funded 01/01/2015 Increase/Decrease from previous year $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $2, $81.27 $83.71 $86.22 $88.80 $ % DECREASE Spending thru 2038: Contributions thru 2038: $4,274, $4,273,571.16

47 Lylewood Glen Townhomes Reserve Analysis for Fiscal 2015 Directed Cash Flow (DCF) Modeling Example Depreciation Funded 12/31/2044: 31.39% Depreciation Funded 01/01/2015: 6.97% $2,000, $1,800, $1,600, $1,400, $1,200, $1,000, $800, $600, $400, $200, $ Expenditures $6, $27, $0.00 $7, $13, $0.00 $26, $16, $9, $8, $15, $112, $9, $38, $0.00 $10, $1,988, $0.00 $87, $23, $0.00 $65, $22, $1,786, $13, $28, $96, $14, $43, $0.00 Contributions $18, $33, $47, $62, $76, $91, $105, $120, $134, $149, $163, $178, $192, $207, $222, $236, $251, $258, $266, $274, $282, $291, $299, $308, $154, $159, $163, $168, $173, $179, Interest Earnings $ $ $ $ $1, $1, $2, $2, $3, $4, $5, $5, $6, $7, $9, $10, $ $1, $2, $4, $5, $7, $9, $ $1, $1, $2, $3, $4, $5, Year End Balance $54, $61, $109, $164, $229, $322, $404, $510, $639, $784, $938, $1,010, $1,200, $1,377, $1,608, $1,845, $108, $368, $549, $804, $1,092, $1,326, $1,612, $135, $277, $410, $480, $637, $772, $956, Monthly Per Unit Contribution $27.10 $48.35 $69.60 $90.85 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ Monthly Change From Previous Year $21.25 $21.25 $21.25 $21.25 $21.25 $21.25 $21.25 $21.25 $21.25 $21.25 $21.25 $21.25 $21.25 $21.25 $21.25 $21.25 $21.25 $11.01 $11.34 $11.68 $12.03 $12.40 $12.77 $ $ $6.77 $6.98 $7.18 $7.40 $7.62 Expenditures Contributions Interest Earnings Year End Balance Monthly Per Unit Contribution Monthly Change From Previous Year

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102 RESERVE DATA ANALYSIS, INC. Midwest Regional Headquarters l 1409 Osborne Road NE, Minneapolis, Minnesota l Metro l Metro Fax April 2013 Are You in Compliance? Minnesota statutory reserve requirements for CICs now fully in effect. It was a long time coming, but the legislature s revised statutory requirements are now fully in effect. First signed by the governor in 2010 and tweaked in 2011, Minnesota s new reserve requirements became effective for all CICs operating under statute 515B (Minnesota Common Interest Ownership Act-- MCIOA) for their fiscal years beginning on or after January 1, This is a review of some of the changes regarding component classification, reserve funding, reserve assessments and disclosure. Brief Summary: The definition of limited common elements has moved to this section and new language added regarding licensing of portions of the common elements for exclusive use Annual Report. Paragraph c(2) now requires you identify the specific components that are funded by reserves together with a statement of the amount in any reserves or association's total replacement fund reserves , Replacement Reserves. This section was completely rewritten. It does not supersede or invalidate your association's declaration. Subject to any stipulations in your declaration, the new language may provide substantial statutory flexibility in determining how you will fund expenses for many of the components the association is obligated to maintain, repair and replace. The focus now shifts toward comprehensive planning and disclosure, which is a dramatic shift from the statute's past mandate to adequately-fund all components for which the association is responsible to replace. Among the changes: a(2): Unless otherwise required by the declaration, you need not reserve for the replacement of (i) components with a remaining useful life of more than 30 years, or (ii) components which will be funded (at the time the expense is incurred) by direct assessments for Limited Common Elements or certain components approved by a majority vote of the board and 51% of the membership. See (a)(5) below a(3): The association must segregate replacement reserves from the association's operating funds, and is not allowed to use or borrow from the replacement reserves to fund operating expenses a(4): The association must re-evaluate the adequacy of its budgeted replacement reserves at least every third year a(5): Unless otherwise required by the declaration, after the termination of the period of declarant control, and subject to approval -- (i) by the board and (ii) by unit owners, other than declarant or its affiliates, of units to which 51 percent of the votes in the association are allocated, -- the association need not annually assess for replacement reserves to replace those components whose replacement is planned to be paid for by special assessments (if permitted by your declaration) levied under section 515B.3-115(c), or by assessments levied under section 515B (e)(2) [Any common expense, or portion thereof, which benefits fewer than all of the units]. The approval provided for in the preceding sentence shall be effective for no more than the association's current and three following fiscal years, subject to modification or renewal by the same approval standards & Assessments for Common Expenses. This section has been substantially modified, particularly paragraphs a, b, c & e Resale of Units. The Resale Disclosure Certificate has changed, including: Common elements licensed under 515B.2-109(e) must be identified. You must provide a written description of the funding plan for expense assessments that will be levied only against fewer than all units, pursuant to 515B.3-115(e), such as Limited Common Elements. You must identify the (reserve) components the association is obligated to replace and the amount of money in reserves for replacement of those components. You must identify the components funded by assessments to be levied only against the unit(s) served by the component, pursuant to 515B.3-115(e)(1) or (2) [Limited Common Elements; areas of the common elements which benefit fewer than all units]. You must disclose any other material matters affecting occupancy or use of the unit, or the owner's obligations with respect to the unit. We believe this would include expenses intended to be funded by means of special assessments levied under 515B.3-115(c), approved by the board and unit owners pursuant to a(5). l Minneapolis l Toll Free l Page 1 of 2

103 RDA s Comprehensive Scope Reserve Studies simplify your long-range planning to help ensure statutory compliance and protect your property values. MN Stat. 515B REPLACEMENT RESERVES; SURPLUS FUNDS. (a) The association shall include in its annual budgets replacement reserves projected by the board to be adequate, together with past and future contributions to replacement reserves to fund the replacement of those components of the common interest community which the association is obligated to replace, by reason of ordinary wear and tear or obsolescence, subject to the following: (1) The amount annually budgeted for replacement reserves shall be adequate, together with past and future contributions to replacement reserves, to replace the components as determined based upon the estimated remaining useful life of each component; provided that portions of replacement reserves need not be segregated for the replacement of specific components. (2) Unless otherwise required by the declaration, annual budgets need not include reserves for the replacement of (i) components that have a remaining useful life of more than 30 years, or (ii) components whose replacement will be funded by assessments authorized under section 515B.3-115(e)(1), or approved in compliance with clause (5). (3) The association shall keep the replacement reserves in an account or accounts separate from the association's operating funds, and shall not use or borrow from the replacement reserves to fund the association's operating expenses, provided that this restriction shall not affect the association's authority to pledge the replacement reserves as security for a loan to the association. (4) The association shall reevaluate the adequacy of its budgeted replacement reserves at least every third year after the recording of the declaration creating the common interest community. (5) Unless otherwise required by the declaration, after the termination of the period of declarant control, and subject to approval (i) by the board and (ii) by unit owners, other than declarant or its affiliates, of units to which 51 percent of the votes in the association are allocated, the association need not annually assess for replacement reserves to replace those components whose replacement is planned to be paid for by special assessments, if the declaration authorizes special assessments, levied under section 515B.3-115(c), or by assessments levied under section 515B.3-115(e)(2). The approval provided for in the preceding sentence shall be effective for no more than the association's current and three following fiscal years, subject to modification or renewal by the same approval standards. (6) Unless otherwise required by the declaration, subsection (a) shall not apply to a common interest community which is restricted to nonresidential use. (b) Unless the declaration provides otherwise, any surplus funds that the association has remaining after payment of or provision for common expenses and reserves shall be (i) credited to the unit owners to reduce their future common expense assessments or (ii) credited to reserves, or any combination thereof, as determined by the board of directors. RESERVE DATA ANALYSIS CELEBRATING 30 YEARS! Adequate Reserve Funding Lowest possible association fees! l Minneapolis l Toll Free l Page 2 of 2

104 RESERVE UPDATE WORKSHEET page 1 of 2 NAME OF ASSOCIATION DATE REPRESENTATIVE TELEPHONE PART 1 PROJECTED RESERVE BALANCE Please estimate the reserve balance at the beginning of the fiscal year for which this report is being prepared. CURRENT RESERVE BALANCE: / / 1 MONTHLY CONTRIBUTION TO RESERVES: NUMBER OF MONTHS TO END OF CURRENT FISCAL YEAR: REMAINING CONTRIBUTIONS (Line 2 x Line 3): ANTICIPATED EXPENDITURES (List IN PART 3): PROJECTED RESERVE BALANCE (Line 1 + Line 4 - Line 5): PART 2 RESERVE EXPENDITURES SINCE LAST STUDY Please provide the following information for reserve expenditures completed since the last RDA reserve study. Or make appropriate notations on past RDA reserve study and mail copy to us. COMPLETION QUANTITY/ RDA ASSET # DESCRIPTION DATE UNITS COST

105 PART 3 ANTICIPATED RESERVE EXPENDITURES Please indicate any anticipated reserve expenditures to be completed this fiscal year. RDA ASSET # DESCRIPTION COMPLETION QUANTITY/ DATE UNITS COST PART 4 ADDITIONAL CHANGES, ADDITIONS OR COMMENTS Please indicate any additional changes, report additions or comments. Please return Update Worksheet and any additional information to: RESERVE DATA ANALYSIS - MIDWEST Phone: (612) (866) Osborne Road NE Fax: (763) (866) Minneapolis, MN info@rdamidwest.com Thank you! page 2 of 2

106 FINANCIAL ew ows for Reserves Budget'ng, Report'ng and Disclosure by Gregory Pettersen, Reserve Data Analysis, Inc. S. ignificant changes lie ahead for So we would like to offer you an outline of Minnesota's condominium, townhome and co-op associations for association is in compliance for steps you might take to help ensure your 2012, their fiscal years beginning on or after January I, Perhaps most noteworthy, associations are now prohibited from using or borrowing from replacement reserves to fund operating expenses. Reserve funding rules for Minnesota CICs have been altered considerably, becoming extremely flexible, and somewhat more complex. Effective next year, the focus shifts more toward due diligence and disclosure, rather than on the actual saving of funds sufficient to pay for all future major expenses. It is a dramatic shift from the past mandate to annually budget adequate reserves for everything the association is obligated to replace. Yet these statutory changes are not meant to supersede or invalidate your association's existing declaration. Since funding is now optional for many items, and disclosure of both funded and unfunded components is required, associations must identify & disclose all the components for which they are responsible, and decide how the needed funds will be collected, whether by reserves or by other means. For many associations, it is back to the drawing board with governing documents in one hand, and the new statutory revisions in the other. This task can be confusing, intimjdating and overwhelming. and beyond. Uncertainties? Don't guess. Your association's attorney, manager or professional reserve planner can help. 1) Identify everything that the association is responsible to maintain, repair or replace. Review your declaration and inventory your facilities and infrastructure. List everything, be specific, and avoid generalizations like "common areas" or "building exterior surfaces." A typical townhome association might be responsible for components such as (but certainly not limited to): Roofs, siding, brick trim, soffit and fascia, gutters and downspouts, sidewalks, stoops, driveways, exterior lighting, trim paint, decks, patios, sidewalks, streets, curbs, mailboxes, monument signs, iltigation systems, storm and sanitary sewers, lateral sewer lines, retaining walls, fences, and so forth. Multi-story condominiums typically have much longer lists, including windows and doors, mechanical and HVAC systems, elevators and various interior items, and amenities like pools and spas, fitness centers or community rooms - all with a litany of furnishings, fixtures, finishes and equipment. Note items that are the unit owner's responsibility. Also check to see if your declaration authorizes special assessments and loans, as these may be alternative funding mechanisms you may want to consider as part of your overall reserve planning. 2) Categorize each component: Common PETTERSEN Element, Limited Common Element, Unit Element, or Common Element of Limited Benefit. Review your declaration (CC&Rs) for assistance in the classification. The category assignment will help you determine which components must be reserved for, which are optional, and whether approval of both the board and 5 I % of the association members (through a vote) is required to forgo reserve funding. 3) Determine whether the declaration (CC&Rs) requires you to reserve fm' Limited Common Elements (LCEs). You might want to reserve for some LCEs and not reserve for others, if you have this option. Unless your declaration provides otherwise, the statute now stipulates that your annual budget need not include reserves for Limited Common Elements or components with a remaining useful life greater than 30 years. (Those long-lived components would later be added to your reserve fund assessments once their remaining life falls to 30 years or less.) Reserves Budgeting continued on page 20 SUMMER 2011 ele MIDWEST NEWS 19

107 r RESERVES BUDGETiNG continued from page 19 4) Identify any portion of the Common Elements that provide an exclusive benefit to "fewer than all" units. Some components, though not classified as Limited Common Elements, may exclusively benefit fewer than all units. You are permitted, unless otherwise required by the declaration, to forgo reserve funding, and instead, simply assess the benefited units at the time the expense is incurred. This approach requires approval of both the board of directors and 51 % of the association votes. Approval is effective for 3 years, then it's subject to modification or renewal by the same standards. Should such a vote fail in the future, a separate reserve schedule will be needed for the component. S) Identify components you plan to fund by Special Assessments rather than by reserves. Unless otherwise required by the declaration (if the declaration authorizes special assessments), you are permitted to forgo reserve funding and instead simply assess the cost among all units at the time the expense is incurred. As with benefit assessments, this approach requires approval of both the board of directors and 51% of the association votes. Approval is effective for 3 years, then subject to modification or renewal by the same standards. Any component which the board and unit owners have voted to fund by means of a planned future special assessment, rather than by reserves, should be disclosed in the resale disclosure certificate (item #13) since it significantly affects the owner's obligations regarding the unit. Should such a vote fail in the future, a separate reserve schedule will be needed for the, component. 6) Make separate lists for funded and unfunded components (LCEs & LBCs). Your annual report and resale disclosures must identify those components with expenses that are budgeted in your replacement reserves, and the amount of reserve savings accrued to date. In addition, the resale disclosure certificate requires you to identify LCEs, and any limited benefit components (LBCs), with expenses assessed solely against the benefited unites), regardless of whether they are reserved over time, or will simply be assessed to the benefited unites) at the time the expense is incurred. A written funding plan must be attached to the resale disclosure certificate for any expenses that are assessed against fewer than all units. 7) Adequately fund your replacement reserve budget each year. While the statute retains the basic standard for "adequate" replacement reserves, it stops short of requiring a professional or formal Reserve Study. However, it requires that each annual budget must include reserve funding "projected by the board of directors to be adequate" (at least barely sufficient) to fund your reserve components. Further, it stipulates the basis on which the reserve budget must be determined: "The amount annually budgeted for replacement reserves shall be adequate, together with past and future contributions to replacement reserves, to replace the components as determined, based upon the estimated remaining useful life of each component, provided that portions of replacement reserves need not be segregated for the replacement of specific components." Clearly, it is not sufficient to simply pull a number out of thin air or survey some other associations to see what they are budgeting. Someone has to identify and compile an inventory of your reserve components, determine replacement costs, estimate their remaining useful lives, and do some math. 8) Reevaluate the adequacy of the reserve budget at least every three years. The statute now requires that the association reevaluate the adequacy of its budgeted reserves at least every three years. We understand this to mean that every three years the association must reassess the estimated remaining lives and replacement costs of the reserve components, recalculate the funding needs, and update the reserve budget to ensure adequate funds will be available when each component is projected to require replacement. 9) Expand your maintenance matrix to indicate the means by which each component's expense is funded. You will find it very beneficial to prepare and distribute a Responsibility and Funding Matrix based upon your specific components and funding policies. It will also help manage owner expectations and satisfy disclosure requirements. 10) Confirm your due diligence and validate your policies with a certification. Remember, your reserve funding policies must satisfy both statutory and governing document requirements. Your declaration is a legal document. Any interpretations should be made, or validated, by a professional legal practitioner. To ensure the validity of your policies, where any uncertainty exists, we recommend you obtain verification from a real estate attorney specializing in community association law prior to implementing the policy. A wlitten legal opinion is preferred. You should then draft and adopt a formal reserve funding policy resolution. Preserve your policy resolution document, together with the written legal opinion, as part of the association's permanent records. Yes, it will take some effolt, but the payoff is huge: Healthy reserves increase property values and improve sales. Owners with a clear understanding of their financial obligations do not start riots. New buyers will not arrive with inaccurate or unreasonable expectations. Documented policies provide a clear reserve budgeting guide for future boards. You can read the new state statute on reserves at on the "Legislative" tab. Gregory Pettersen Reserve Data Analysis, inc. (612) 6/ info@rdamidwest.com CIC MIDWEST NEWS SUMMER 2011

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202 Reserve Data Analysis Example Association Maintenance Responsibility and Funding Matrix Component Description Level of Service - Maintain; Repair; Replace. 1 2 Reserve Funding to Funding to begin when accrue in remaining Reserve life 30 years Budget. or less. Means by Which Funding is Provided 3 Reserve Funding assessed only to unit(s) benefited. 4 5 Expense Expense Special charged to Assessed benefited among all owner(s) at units when time cost incurred. incurred. 6 Maintenance, repair & replacement is direct homeowner's responsibility. 7 OTHER: Specify Below Roofs: composite shingles, architectural grade, 30 year warranty. Repair X Replace X Siding: standard grade Dutch Lap vinyl Repair X Replace X Soffit & Fascia: prefinished metal. Repair X Replace X Gutters & Downspouts - Standard Quantity common to all units. Repair X Replace X Gutters & Downspouts - Non-Standard extra guttering; added by unit Repair X owner. Replace X Common area sidewalks Repair X Replace X Unit Sidewalks Repair X Replace X Unit Stoops Repair X Replace X Unit Patios Repair X Replace X Unit Decks & Railings Paint/Stain X Repair X Replace X Unit Windows Repair X Replace 50% 50% Unit Doors Paint X Repair X Replace X Unit Exterior Lighting Repair X Replace X Garage Aprons Repair X Replace X Overhead Garage Doors Paint X Repair X Replace X Garage Door Openers All X Concrete Curbs & Gutters Repair X Replacement scheduled to coincide with street 40 years. Replace X Driveways - Asphalt Annual Clean, X crack seal, minor repairs Sealcoat replaces lost aggregate fines & binders. Sealcoat X Midlife failures provides for replacement of failed base and subsoil. Midlife X Failures Replace X Streets Annual X Cleaning, crack seal, minor repairs Chipcoat provides new wear surface and UV protection. Chipcoat X Midlife failures provides for replacement of failed base and subsoil. Overlays & reconstruction scheduled to Alternate at 20 year intervals. Midlife Failures X Overlay X Reconstruct X Continued on next page 8 Funding to be included in annual Operating Budget.

203 Continued from previous page Means by Which Funding is Provided Component Description Level of Service - Maintain; Repair; Replace. 1 2 Reserve Funding to Funding to begin when accrue in remaining Reserve life 30 years Budget. or less. 3 Reserve Funding assessed only to unit(s) benefited. 4 5 Expense Expense Special charged to Assessed benefited among all owner(s) at units when time cost incurred. incurred. 6 Maintenance, repair & replacement is direct homeowner's responsibility. 7 OTHER: Specify Below 8 Funding to be included in annual Operating Budget. Entrance - Wrought Iron, Gates All X Mailboxes: Cluster Box Units Repair USPS Replace X Street, traffic & directional signs Repair X Replace X Monument Signs Repair X Replace X Keystone Retaining Walls Repair X Replace X Landscape: periodic refurbishment, rock beds, tree trimming, etc. Refurbish X Shrubs & Trees Replace X Irrigation System: Replace X Backflows inspected annually; repair/replace as-needed or minimum 5 year interval per state law. Total system replacement unbudgeted; individual zones or areas may be Controller Backflow Valve X replaced upon failure. Special assessment will be required if total system Repairs X replacement becomes necessary or desirable. Replace X Sanitary Sewer Lateral Lines to homes All X Water lines from valve to structure All X Water Mains; sanitary sewer; storm sewer lines, catch basins, etc. All If assessed City TV Inspect all sewer lines before street reconstruction. Inspection X Streetlights All Utility Co. Boat Slips: All X Main Dock Repair X Replace X Reserve Study Update with On-site Review, 3 year intervals. Update X 1) These expenses are budgeted to accrue in the association's replacement reserve account and are included in the annual assessment. 2) These expenses are not currently budgeted in reserves but are to be added when the estimated remaining life falls within 30 years. 3) These expenses are budgeted to accrue in replacement reserves. However, their reserve contributions are assessed only to the benefited unit(s). 4) These expenses are to be special assessed, if the declaration allows special assessments, against all owners at the time the expense is incurred. The board and at least 51% of unit owners must approve exclusion from reserve funding at least every 3 years. NOTE: Declaration may limit implementing Special Assessments. 5) These expenses are to be assessed only against benefited owners at the time the expense is incurred. Unless the declaration requires otherwise, Limited Common Elements may be excluded [5115B.3-115(e)(1)] from reserve funding simply by policy. For so-called benefit assessments [515B.3-115(e)(2)], both the board and at least 51% of unit owners must approve exclusion from reserve funding at least every 3 years. 6) The administrative and financial obligations are the homeowners direct and individual responsibility, subject to community standards. 7) These expenses are funded by the entity or means noted. 8) These expenses are to be included in the association's annual operating budget for the year in which they occur. Note: Funding obligations and options are subject to the association's declaration as well as statutory stipulations. Minnesota Statute was amended in 2010 & B Replacement Reserves. While the Amendment retains the basic standard for 'adequate' replacement reserves, it stipulates the basis on which reserves must be determined, but stops short of requiring a professional Reserve Study. It requires replacement reserves be kept separate from operating funds, and expressly prohibits the use of, or borrowing from, replacement reserves to fund the association's operating expenses. The association must reevaluate the adequacy of its replacement reserves at least every third year after the recording of the declaration. Reserve funding is optional for Limited Common Elements and components with a remaining estimated useful life greater than 30 years. The Amendment includes a flexibility provision whereby, unless otherwise provided by the declaration, after the termination of the period of declarant control the association may fund certain replacement costs through special assessments (if the Declaration provides for special assessments) or other assessments rather than annual assessments; provided that such a plan is approved by the board and by 51% of unit owners-- excluding the declarant or its affiliates. The vote must be reaffirmed at 3 year intervals, per 515B (a)(5).

204 COMMON INTEREST COMMUNITY RESALE DISCLOSURE CERTIFICATE Name of Common Interest Community: Name of Association: Address of Association: Unit Number(s) (include principal unit and any garage, storage, or other auxiliary units): Common elements licensed under Minnesota Statutes, subsection 515B.2-109(e): The following information is furnished by the association named above according to Minnesota Statutes, section 515B There is no right of first refusal or other restraint on the free alienability of the above unit(s) contained in the declaration, bylaws, rules and regulations, or any amendment to them, except as follows: 2. The following periodic installments of common expense assessments and special assessments are payable with respect to the above unit(s): a. Annual assessment installments: $ Due: b. Special assessment installments: $ Due: c. Unpaid assessments, fines, or other charges: (1) Annual $ (2) Special $ (3) Fines $ (4) Other Charges $ d. The association has/has not (strike one) approved a plan for levying certain common expense assessments against fewer than all the units according to Minnesota Statutes, subsection 515B.3-115(e). If a plan is approved, a description of the plan is attached to this certificate. 3. In addition to the amounts due under paragraph 2, the following additional fees or charges other than assessments are payable by unit owners (include late payment charges, user fees, etc.): 4. There are no extraordinary expenditures approved by the association, and not yet assessed, for the current and two succeeding fiscal years, except as follows: page 1 of 4

205 5. The association is obligated to replace the following components of the common interest community: The association has the following amounts in its reserves for replacement of those components: The replacement of the following components is funded by assessments levied only against the unit or units served by the component, pursuant to Minnesota Statutes subsection 515B.3-115(e) (1) or (2). 6. The following documents are furnished with this certificate according to statute: a. The most recent regularly prepared balance sheet and income and expense statement of the association. b. The current budget of the association. 7. There are no unsatisfied judgments against the association, except as follows (identify creditor and amount): 8. There are no pending lawsuits to which the association is a party, except as follows (identify and summarize status): 9. Description of insurance coverages: a. The association provides the following insurance coverage for the benefit of unit owners: (Reference may be made to applicable sections of the declaration or bylaws; however, any additional coverages should be described in this space) b. The following described fixtures, decorating items, or construction items within the unit referred to in Minnesota Statutes, subsection 515B.3-113(b), are insured by the association (check as applicable): Ceiling or wall finishing materials Finished Flooring Cabinetry page 2 of 4

206 Finished millwork Electrical, heating, ventilating and air conditioning equipment or plumbing fixtures serving a single unit Built-in appliances Improvements and betterments as originally constructed Additional improvements and betterments installed by unit owners 10. The board of directors of the association has not notified the unit owner -- (i) that any alterations or improvements to the unit or to the limited common elements assigned to it violate any provision of the declaration; or (ii) that the unit is in violation of any governmental statute, ordinance, code, or regulation, --except as follows: 11. The remaining term of any leasehold estate affecting the common interest community and the premises governing any extension or renewal of it are as follows: 12. This Resale Disclosure Certificate is given in connection with the resale of a unit by a unit owner who is not a declarant and who, therefore, is not liable for express warranties under Minnesota Statutes, section 515B or implied warranties under Minnesota Statutes, section 515B The conveyance of this unit may, however, result in a transfer of pre-existing warranties made by a declarant under the referenced statutes, subject to the terms of Minnesota Statutes, sections 515B and 515B In addition to the above, the following matters affecting the occupancy or use of the unit, or the unit owner's obligations with respect to the unit, are deemed material: I hereby certify that the foregoing information and statements are true and correct as of (Date) By: Title: (Association representative) Address: Phone Number: page 3 of 4

207 RECEIPT [Of Common Interest Community Resale Disclosure Documents] In addition to the foregoing information furnished by the association, the unit owner is obligated to furnish to the purchaser before execution of any purchase agreement for a unit or otherwise before conveyance, copies of the following documents relating to the association or to the master association (as applicable): the declaration (other than any common interest community plat), articles of incorporation, bylaws, rules and regulations (if any), and any amendments to these documents. Receipt of the foregoing documents, and the resale disclosure certificate, is acknowledged by the undersigned buyer(s). Dated: (Buyer) Dated: (Buyer) page 4 of 4

208 CAI National Reserve Study Standards Rolled out in early 1998, CAI s National Reserve Study Standards provided a greatly needed framework for the community association industry which paved the way for the future of Common Interest Communities nationwide. Providing consistent terminology, basic disclosures within the Reserve Study, defining the three "Levels of Service" provided, and a credentialing program for professional providers (the "Reserve Specialist" designation), CAI s minimum reserve study standards brought order to this relatively new industry. Reserve Study A Reserve Study is made up of two parts: the information about the physical status and repair/replacement cost of the major common area components the association is obligated to maintain (Physical Analysis), and the evaluation and analysis of the association's Reserve balance, income, and expenses (Financial Analysis). The Physical Analysis is comprised of the Component Inventory, Condition Assessment, and Life and Valuation Estimates. The Component Inventory should be relatively "stable" from year to year, while the Condition Assessment and Life and Valuation Estimates will necessarily change from year to year. The Financial Analysis is made up of a finding of the client's current Reserve Fund status (measured in cash or as Percent Funded) and a recommendation for an appropriate Reserve contribution rate (Funding Plan). Reserve Study Physical Analysis Component Inventory Condition Assessment Life and Valuation Estimates Financial Analysis Fund Status Funding Plan Levels of Service The following three categories describe the various types of Reserve Studies, from exhaustive to minimal. Full: A Reserve Study in which the following five Reserve Study "Tasks" are performed: Component Inventory Condition Assessment (based upon on-site visual observations) Life and Valuation Estimates Fund Status Funding Plan Update, With-Site-Visit/On-Site Review: A Reserve Study update in which the following five Reserve Study "Tasks" are performed: Component Inventory (verification only, not quantification) Condition Assessment (based on on-site visual observations) Life and Valuation Estimates Fund Status Funding Plan Update, No-Site-Visit/Off Site Review: A Reserve Study update with no on-site visual observations in which the following three Reserve Study "Tasks" are performed: Life and Valuation Estimates Fund Status Funding Plan Reserve Data Analysis, Inc. Midwest Regional Headquarters Minneapolis

209 Terms and Definitions CASH FLOW METHOD: A method of developing a Reserve Funding Plan where contributions to the Reserve fund are designed to offset the variable annual expenditures from the Reserve fund. Different Reserve Funding Plans are tested against the anticipated schedule of Reserve expenses until the desired Funding Goal is achieved COMPONENT: The individual line items in the Reserve Study, developed or updated in the Physical Analysis. These elements form the building blocks for the Reserve Study. Components typically are: 1) Association responsibility, 2) with limited Useful Life expectancies, 3) predictable Remaining Useful Life expectancies, 4) above a minimum threshold cost, and 5) as required by local codes. COMPONENT INVENTORY: The task of selecting and quantifying Reserve Components. This task can be accomplished through on-site visual observations, review of association design and organizational documents, a review of established association precedents, and discussion with appropriate association representative(s). COMPONENT METHOD: A method of developing a Reserve Funding Plan where the total contribution is based on the sum of contributions for individual components. See "Cash Flow Method". CONDITION ASSESSMENT: The task of evaluating the current condition of the component based on observed or reported characteristics. CURRENT REPLACEMENT COST: See "Replacement Cost". DEFICIT: An actual (or projected) Reserve Balance less than the Fully Funded Balance. The opposite would be a Surplus. EFFECTIVE AGE: The difference between Useful Life and Remaining Useful Life. Not always equivalent to chronological age, since some components age irregularly. Used primarily in computations. FINANCIAL ANALYSIS: The portion of a Reserve Study where current status of the Reserves (measured as cash or Percent Funded) and a recommended Reserve contribution rate (Reserve Funding Plan) are derived, and the projected Reserve income and expense over time is presented. The Financial Analysis is one of the two parts of a Reserve Study. FULLY FUNDED: 100% Funded. When the actual (or projected) Reserve balance is equal to the Fully Funded Balance. FULLY FUNDED BALANCE (FFB): Total Accrued Depreciation. An indicator against which Actual (or projected) Reserve balance can be compared. The Reserve balance that is in direct proportion to the fraction of life "used up" of the current Repair or Replacement cost. This number is calculated for each component, then summed together for an association total. Two formulae can be utilized, depending on the provider's sensitivity to interest and inflation effects. Note: both yield identical results when interest and inflation are equivalent. FFB = Current Cost X Effective Age / Useful Life. or FFB = (Current Cost X Effective Age / Useful Life) + ((Current Cost X Effective Age / Useful Life) / (1 + Interest Rate) ^ Remaining Life) - ((Current Cost X Effective Age / Useful Life) / (1 + Inflation Rate) ^ Remaining Life) FUND STATUS: The status of the reserve fund as compared to as established benchmark such as percent funding. FUNDING GOALS: Independent of methodology utilized, the following represent the basic categories of Funding Plan goals: BASELINE FUNDING: Establishing a Reserve funding goal of keeping the Reserve cash balance above zero. FULLY FUNDING: Setting a Reserve funding goal of attaining and maintaining Reserves at or near 100% funded. STATUTORY FUNDING: Establishing a Reserve funding goal of setting aside the specific minimum amount of Reserves required by local statues. Reserve Data Analysis, Inc. Midwest Regional Headquarters Minneapolis

210 THRESHOLD FUNDING: Establishing a Reserve funding goal of keeping the Reserve balance above a specified dollar or Percent Funded amount. Depending on the threshold, this may be more or less conservative than "Fully Funding". FUNDING PLAN: An Association's plan to provide income to a Reserve fund to offset anticipated expenditures from that fund. FUNDING PRINCIPLES: In the development of a Funding Plan, the following four principles are to be considered: Sufficient Funds when Required (adequate) Stable Contribution Rate over the Years (smooth annual transitions) Equitably Distributed Contributions over the Years (fairness) Fiscally Responsible LIFE AND VALUATION ESTIMATES: The task of estimating Useful Life, Remaining Useful Life, and Repair or Replacement Costs for the Reserve components. PERCENT FUNDED: The ratio, at a particular point of time (typically the beginning of the Fiscal Year), of the actual (or projected) Reserve Balance to the Fully Funded Balance, expressed as a percentage. PHYSICAL ANALYSIS: The portion of the Reserve Study where the Component Inventory, Condition Assessment, and Life and Valuation Estimate tasks are performed. This represents one of the two parts of the Reserve Study. REMAINING USEFUL LIFE (RUL): Also referred to as "Remaining Life" (RL). The estimated time, in years, that a reserve component can be expected to continue to serve its intended function. Projects anticipated to occur in the initial year have "zero" Remaining Useful Life. REPLACEMENT COST: The cost of replacing, repairing, or restoring a Reserve Component to its original functional condition. The Current Replacement Cost would be the cost to replace, repair, or restore the component during that particular year. RESERVE BALANCE: Actual or projected funds as of a particular point in time that the association has identified for use to defray the future repair or replacement of those major components which the association is obligated to maintain. Also known as Reserves, Reserve Accounts, Cash Reserves. RESERVE PROVIDER: An individual that prepares Reserve Studies. RESERVE STUDY: A budget planning tool which identifies the current status of the Reserve fund and a stable and equitable Funding Plan to offset the anticipated future major common area expenditures. The Reserve Study consists of two parts: the Physical Analysis and the Financial Analysis. "Our budget and finance committee is soliciting proposals to update our Reserve Study for next year's budget." RESPONSIBLE CHARGE: a Reserve Specialist in responsible charge of a Reserve Study shall render regular and effective supervision to those individuals performing services which directly and materially affect the quality and competence rendered by the Reserve Specialist. A Reserve Specialist shall maintain such records as are reasonably necessary to establish that the Reserve Specialist exercised regular and effective supervision of a Reserve Study of which he was in responsible charge. A Reserve Specialist engaged in any of the following acts or practices shall be deemed to not have rendered the regular and effective supervision required herein: The regular and continuous absence from principal office premises from which professional services are rendered; except for performance of field work or presence in a field office maintained exclusively for a specific project; The failure to personally inspect or review the work of subordinates where necessary and appropriate; The rendering of a limited, cursory or perfunctory review of plans or projects in lieu of an appropriate detailed review; The failure to personally be available on a reasonable basis or with adequate advance notice for consultation and inspection where circumstances require personal availability. SPECIAL ASSESSMENT: An assessment levied on the members of an association in addition to regular assessments. Special Assessments are often regulated by Governing Documents or local statutes. Reserve Data Analysis, Inc. Midwest Regional Headquarters Minneapolis

211 SURPLUS: An actual (or projected) Reserve Balance greater than the Fully Funded Balance. See "Deficit". USEFUL LIFE (UL): Total Useful Life or Depreciable Life. The estimated time, in years, that a reserve component can be expected to serve its intended function if properly constructed in its present application or installation. CAI s Professional Designation - RS The following is an outline of the designation application. The RS designation is intended for individuals, and is designed to demonstrate a basic level of competency within the industry. The application is comprised of four parts: Background, Experience and Sample Work Product, References, and Continuing Experience. All four parts must be completed and submitted to apply for the credential via the Reserve Specialist (RS) Application. QUALIFICATION GUIDELINES: I. Background: College bachelor level degree in construction management, architecture, or engineering; Or Four years prior related experience (prior to and in addition to direct Reserve Study experience) in a field servicing community associations (accounting, association management, construction, etc.); Or Trade school diploma and two years prior related experience (prior to and in addition to prior Reserve Study experience). II. Experience and Sample Work Product: Must certify preparation of or be in responsible charge for preparing at least 50 Reserve Studies within the past three calendar years. Must submit one study of the applicant's original work using format on application, including all five tasks as described within for a "Full" study. One sample work product must have been submitted to demonstrate that minimum Report requirements and disclosures have been met. III. References: Two references from community association industry professionals. Five references from different clients. IV. Continuing Experience: Must continue to prepare or be in responsible charge for the preparation of at least 10 Reserve Studies for Community Associations based on visual on-site observations. Renewal applications, required every third year, will require documentation of this experience. Reserve Study Contents The following is a list of the minimum contents to be included in the Reserve Study. A summary of the association's number of units, physical description, and Reserve Fund financial condition. A projection of Reserve Starting Balance, recommended Reserve contributions, projected Reserve expenses, and projected ending Reserve Fund Balance for a minimum of 20 years. A tabular listing of the Component Inventory, component quantity or identifying descriptions, Useful Life, Remaining Useful Life, and Current Replacement Cost. A description of methods and objectives utilized in computing the Fund Status and development of the Funding Plan. Source(s) utilized to obtain component Repair or Replacement cost estimates. A description of the Level of Service by which the Reserve Study was prepared. Fiscal Year for which the Reserve Study is prepared. Reserve Data Analysis, Inc. Midwest Regional Headquarters Minneapolis

212 Disclosures The following are the minimum disclosures to be included in the Reserve Study. General: Description of other involvement(s) with the association which could result in actual or perceived conflicts of interest. Physical Analysis: Description of how thorough the on-site observations were performed: representative sampling vs. all common areas, destructive testing or not, field measurements vs. drawing take-offs, etc. Financial Analysis: Description of assumptions utilized for interest and inflation, tax, and other outside factors. Personnel Credentials: State or organizational licenses or credentials carried by the individual responsible for Reserve Study preparation or oversight. Update Reports: Disclosure of how the current work is reliant on the validity of prior Reserve Studies. Completeness: Material issues which, if not disclosed, would cause a distortion of the association's situation. Reliance on Client Data: Information provided by the official representative of the association regarding financial, physical, quantity, or historical issues will be deemed reliable by the consultant. The Reserve Study will be a reflection of information provided to the consultant and assembled for the association's use, not for the purpose of performing an audit, quality/forensic analyses, or background checks of historical records. Reserve Balance: The actual or projected total presented in the Reserve Study is based upon information provided and was not audited. Component Quantities: For Update With-Site-Visit and Update No-Site-Visit Levels of Service, the client is considered to have deemed previously developed component quantities as accurate and reliable. Reserve Projects: Information provided about Reserve projects will be considered reliable. Any on-site inspection (visual examination) should not be considered a project audit or quality inspection. Reserve Data Analysis, Inc. Midwest Regional Headquarters Minneapolis

213 XYZ Homeowners Association RDA (SAMPLE) POLICY ON RESERVES Adopted: xx/xx/xxxx Definitions: The determination of whether an expense should be labeled an operational expense, a reserve expense, or excluded altogether from a budget is sometimes subjective. Since this classification may have a major impact on the financial plans of the association, subjective determinations should be minimized. Therefore, for purposes of this policy: "Operational Expenses" and "Operating Budget Items" shall be defined as expenses, which are identified by the Board of Directors, as occurring on an annual or greater frequency, no matter the size of the expense, and are considered by the Board to be effectively budgeted for on an annual basis. They are characterized as being reasonably predictable both in terms of frequency and cost. Operational expenses normally include all minor expenses which would not otherwise adversely affect an operational budget from one year to the next. "Reserve Expenses" and "Reserve Budget Items" shall be defined as expenses, which are identified by the Board of Directors, as major expenses which occur other than annually and which are budgeted for in advance in order to provide the necessary funds in time for their occurrence. Reserve expenses are generally reasonably predictable both in terms of frequency and cost. However, they may include significant components which have an indeterminable but potential liability to the development and which may be demonstrated as a likely occurrence. They are expenses, which when incurred, would have a significant effect on the smooth operation of the budgetary process from one year to the next, were they not reserved for in advance. Reserve budgets for associations normally do not include repairs or replacements of assets which are deemed to have an estimated useful life equal to or exceeding the estimated useful life of the facility or development itself, or exceeding the legal life of the development as defined in an association's governing documents. Also excluded are insignificant expenses which may be covered either by an operating or reserve contingency, or otherwise in a general maintenance fund. Costs which are caused by acts of God, accidents or other occurrences which are more properly insured for, rather than reserved for, are also normally excluded. Section I: As soon as possible after construction of the initial phase of the project, the Association shall cause a Reserve Study to be completed incorporating all aspects of the existing development. The study, and written report, must meet or exceed the National Reserve Study Standards of the Community Associations Institute (CAI) of Alexandria, Virginia ( and be performed by a qualified person with experience in conducting such studies. The Reserve Study preparer shall abide by the CAI Code of Ethics for Reserve Specialists (whether credentialed or not) and shall certify full compliance with all these aforementioned requirements. Section II: The Board of Directors for the association shall review the completed reserve study for content and take all necessary precautions to assure that the analysis is as complete and accurate as possible, and that the analysis accurately reflects the goals, policies and procedures set forth and practiced by the Association. Section III: The Board of Directors shall adopt a reserve funding plan calculated to avoid special assessments and to assure that the Association will accrue adequate reserves on a cumulative basis to meet its obligations in maintaining the development in a good state of repair, in accordance with its own policies, and in accordance with the requirements set forth by the Association's governing documents and applicable statutes. In adopting a funding plan, the Board of Directors shall act in good faith, in a manner believed to be in the best interest of the present and future membership, and with such care as an ordinarily prudent and reasonable person in like position would use under similar circumstances. Section IV: All reserve funds shall be segregated from other association monies and shall be invested only in accounts or instruments fully guaranteed against any loss of principal and accrued interest earnings. Expenditures of reserve funds for items contained in the reserve schedule are subject to prior approval by a vote (simple majority) of the Board of Directors. Expenditures of reserve funds for items NOT funded in the reserve schedule must first be approved by either a unanimous vote of the Board of Directors or by a vote (simple majority) of the entire membership. Reserve funds may only be used for capital expenditures, except in the case of disbursements related to dissolution of the corporate entity. Section V: The Board of Directors shall review the reserve study and adopted funding plan at least annually, and shall consider and implement any necessary adjustments to the reserve budget as a result of that review. At least once every three years the Board of Directors shall cause an updated analysis of the reserve study to be conducted incorporating all new and/or changed aspects of the development. This update must be performed in full compliance with Section I, above, and shall meet the level of service "Update with Site Visit" as defined by the National Reserve Study Standards. Revised November, 2005 COPYRIGHT RESERVE DATA ANALYSIS MIDWEST TOLL FREE (866)

214 RESERVE DATA ANALYSIS - MIDWEST Osborne Road Northeast - Minneapolis, Minnesota MPLS (612) TOLL FREE: (866) FAX: (866) info@rdamidwest.com Protect Your Association Finances Volunteer boards of directors of condominiums, cooperatives, and homeowners' associations often perform a number of functions vital to the successful self-governance of the association: fostering community harmony, maintaining common areas and establishing and enforcing rules. The ability of the association to perform these functions depends upon its success as a business. One of the most important business functions of the board is to oversee the association's financial well-being. Here are several proven practices that will help protect association finances. Before implementing the following suggestions, however, always check your governing documents and state statutes. 1 Conduct An Annual Audit, Review Or Compilation. A certified public accountant (CPA), selected by the association board, should conduct an annual analysis of the association's finances. The accountant should have access to original books and records. All personnel, contractors, and volunteers should cooperate fully during the course of the analysis. The association board may request one of three levels of service from the accountant: compilation, review or audit. In a compilation, the accountant presents the association's financial statements in a manner consistent with generally accepted accounting principles. A compilation involves little analysis and no confirmation of balances. Often, the accountant will prepare the yearend adjustments, such as accounts payable or income tax accruals. In a review, the accountant investigates record-keeping practices and accounting policies and analyzes the statements. The accountant prepares disclosures on unusual items or trends that may require explanation. In an audit, the accountant performs a more thorough analysis, which may include confirming bank balances, making physical inspections, and tracing transactions to invoices and evidence of payments. Although an audit is a more comprehensive examination of an association's financial statements, it is not an analysis of the board's policy decisions or its use of resources. After the analysis is completed, the accountant expresses an opinion based on the results of the audit tests and examinations. The opinion is independent of the association and management. Before deciding which method to use, check association documents and state statutes. A full audit may be required. And always consider conducting a review or audit when a major change is made in the way the association handles its finances (e.g., transition from developer to owner control or a change in management) 2 Ask For A Management Letter. Ask your accountant for a management letter. In this letter, the accountant reports any weaknesses in the association's financial systems, as well as issues concerning internal control, income tax, reserves, and document compliance. The cost of the report is minor compared to the consequences of an inadequately scrutinized financial system. After the accountant has written the management letter, he or she should review it with the board 3 Reconcile Statements Quarterly. The board should review bank statements or passbooks for all cash accounts at least every three months. The board must see that bank statements are reconciled in a timely fashion. If the treasurer reconciles the bank statements, then the board should designate another person to review the reconciliation. If the reconciliations are done by a manager, management agent, or bookkeeping service, the treasurer of the board should carefully evaluate the system, its internal controls, and the reconciliations and calculations. 4 Request Monthly or Quarterly Financial Statements. The accountant should submit a financial report to the board at least every three months. The report should include a balance sheet, profit and loss statement, and a comparison of the budget to actual expenditures. The financial statements should show activity for both the operating and reserve funds. The financial statements may be prepared on either a cash, accrual, or modified cash basis. The accrual method is effective for most associations because it matches revenues to expenses incurred more accurately Regardless of the accounting method used by the association, the board should monitor an aged list of accounts receivable (delinquencies) and accounts payable (unpaid hills) The financial report should he accompanied by an explanation of any significant variances, such as significant cash surpluses, shortages, excessive accounts payable or receivable, or major budget overruns The board should investigate any excessive variance and ask questions if the financial statements are not produced 15 to 30 days after the close of the period The board should closely review the income statement, compare it with the budget, and question any major difference. 5 Exclusive Board Control of Reserve Transactions. The board must have full and separate control over the association's reserve account(s), including the signatory control of bank accounts. All transactions made by board designees should be reported and verified in writing. These transactions should he approved by the board, and that

215 approval should be documented in the board's meeting minutes. The reserve cash funds should be separate from the operating cash accounts. A reserve study should be prepared every three to five years, and it should be reviewed annually. This study should be used in reviewing the adequacy of reserves, as well as the funding and spending of reserve funds. 6 Investment Policy That Ensures Safety of Principal. The board must decide where and when to invest. CAIs Accountant's Committee recommends (and many association documents require) that all association funds be invested in government-insured accounts or instruments of similar security. Make sure the balances do not exceed the bank's or fiduciary's insurance limits. Safety of principal is the utmost investment objective for associations, not high yields. The higher the yield is, the riskier the investment. Deal only with licensed, insured, and bonded brokers and agents. 7 Do Not Commingle Association Funds. The association's funds should not be commingled with the funds of any other organization. If the association does commingle funds, however, it should put the monies in a trust account with clearly defined safeguards. 8 Prepare Written Collection Policies. The association should have a written collection policy for delinquent accounts receivable (the assessments). This policy should be distributed to the members and uniformly enforced to enhance collections; an association should obtain a bank lockbox so it can deposit assessments directly into its account. Such a system speeds up deposits. It also eliminates a number of "weak links" in the chain of financial management by ensuring that the vast majority of association funds are sent into the association's account without being handled by volunteers, employees, or agents. 9 Determine Policy for Signatory Control. Associations should require two board signatures on all reserve checks, redemptions, or fund transfer requests. One of these signatures should be from an appropriate board officer (e.g., treasurer). For operating cash accounts, associations should consider requiring two signers for all checks above a certain limit. Though obtaining a second signature for checks on operating cash can be an inconvenience, associations should weigh the extra control and protection this procedure provides against any delays it may cause. 10 Fidelity Bond for Manager &/or Employees. Associations must insist that the manager and/or employees are sufficiently bonded to cover all association funds reasonably at risk The association should also have its own fidelity bond to cover volunteers and any employees who either have access to or who handle funds. If possible, the association should add management employees and principals to the association's bond. Associations should require 60 days' notice prior to cancellations or nonrenewals of the management agent's or the association's bonds. 11 Prohibit Kickbacks in Writing. Employment agreements and management contracts should specify that kickbacks from contractors, employees, or others are not allowed. Also, associations should establish in writing that any benefits, credits, discounts, or free services provided by a financial institution or contractor must benefit the association, not the management agent, employee, or individual contractor. 12 Require Written Disclosure of Conflicts of Interest. Insist that any significant relationship among prospective consultants, contractors, attorneys, accountants, etc. be disclosed prior to retaining their services. This policy should apply to the board, officers, and committees, as well as to employees and the manager. 13 Purchase D&O Liability Insurance. The board of directors should have adequate Directors & Officers coverage to protect against lawsuits alleging errors or omissions by the board in the performance of its duties. 14 Always Maintain Control of Association Documents. Documents generated by the association and the manager in the course of the manager's work, as well as association books and records, are the property of the association. They must be turned over to the association at the conclusion of the management contract. 15 Establish Good Financial Procedures The board must ensure the safety of its financial systems and implement effective internal controls. Here are examples of good checks and balances: Use multiple parties to handle cash, whether from assessments or from vending machines, guest fees, etc. Require two signatures on all checks over a certain amount and on all reserve or investment transactions. Do not allow the person who approves invoices to write checks. Do not allow the person recording receipts to make deposits. Minimize cash transactions. Write all checks to the payee-not to "cash." Pay all employees and vendors with a check. Insist that all payments to the association are made out in the name of the association-not the manager, managing agent, or board member. Deposit checks directly to the association's account on a daily basis or store overnight in a fireproof safe. Reconcile bank statements monthly. Arrange for annual audit, review, or compilation, including a management letter from the accountant. Obtain an engagement letter from the association's accountant that defines the work and fees. Conduct an annual review of all insurance policies, especially those policies relating to financial matters. Review the association's tax status and tax planning for the upcoming year with an accountant. Have a reserve study prepared every three to five years, then review that study annually. If the association books are maintained on a cash basis, maintain the accounts receivable on the accrual basis. A report of payables should accompany the financial statements.

216 The Board's Duty to Fund Association Reserves The primary responsibility of a common interest community is to preserve, protect and enhance the community as a whole. Each director is responsible to ensure the association fulfills its obligations. State statutes legally define the standard of conduct for directors in their duty to oversee the affairs of the association. While Declarants and their appointed directors hold a fiduciary responsibility which demands the highest degree of care, all directors are legally obliged to execute their duties in a responsible manor, obtaining expert advice and counsel as necessary. This Standard of Conduct includes: acting in good faith (sincerity, fidelity, deference); prudence (common sense, caution, deliberation, circumspection); and loyalty (allegiance, best interest of the corporation). Board members must never put their personal interest, or the interest of another, ahead of the association's. Willful neglect and reckless misconduct are strictly taboo! A breach of duty occurs when the directors fail to perform an official duty or legal requirement. Nonmanagement is mismanagement. The courts have found board inaction to be a breach of duty and the Business Judgment Rule not applicable [Agassiz v Solum, ND Sup Ct. Civil No ]. Some state statutes, and many association governing documents, explicitly require the association establish and maintain a capital reserve fund to pay for the eventual replacement of the parts of the community for which the association is responsible. To meet this obligation the reserve savings rate must be sufficient to meet the projected major repair and replacement costs. To fulfill this duty to fund reserves it is essential that every association prepare a long range capital budget. The legal standard of conduct requires the board of directors perform their due diligence, including discovery, analysis, planning and action. If you haven't got a plan, you haven't done your due diligence. Due Diligence in preparing an adequate reserve fund budget requires discovery, planning and disclosure. Discovery begins by compiling a comprehensive list of all the components which the association is responsible to maintain, repair or replace and which costs are to be reserved. A physical and financial analysis is then conducted. The National Reserve Study Standards outline the minimum criterion for conducting a reserve analysis. An inventory is prepared for each component, its replacement cost determined, its physical condition assessed and its remaining life is estimated. This data is used to calculate accrued depreciation in order to evaluate the Reserve Fund Status. The Fund Status is often stated as a percentage of the total accrued depreciation, summed for all reserve components. For example, if the fund has $100, in reserve funds and $400, of depreciation it is 25% funded. (It also means that 75% of its accrued depreciation is unfunded.) A projection of future reserve expenditures is also prepared. The board must select a funding goal, and an appropriate funding plan is then calculated. Typical goals are: (1) Baseline Funding- Simply keep the reserve balance above zero or (2) Full Funding- Fund to a level equal to the Fully Funded Balance (total accrued depreciation) for all components. Disclosure regarding the association's reserve funds occurs by several means, including: special notice, annual reports of the treasurer, annual & interim financial statements, auditor's report, declarant disclosure and resale disclosure. Cover all the bases. Formal Reserve Policies help ensure conduct of good faith, loyalty, prudence and diligence. For continuity, safety and long term success associations should adopt formal reserve policies-- preferably embedded in the association's bylaws by means of an amendment. Policies created by simple board resolutions lack long-term effectiveness as they are too easily changed. Exercise extreme caution when constructing your reserve policies. Your attorney can ensure proper execution of the amendment process and help you avoid stipulations which may adversely affect the association in the future. Reserve policies should address: (1) The board's duty to budget sufficiently to meet the funding goal. (2) Co-mingling reserve & operating funds, cash flow management parameters and borrowing. (3) Separate accounting or reporting requirements. (4) Investment stipulations-safety, Liquidity & Yield. (5) Authorized and prohibited uses of funds. (6) Expenditure authorization requirements & account access. (7) Fidelity insurance. (8) Reserve Study Update intervals. Reserve Data Analysis, Inc. (612) (866)