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1 VÜxx~Ëá Xwzx tà fàéçç cé Çà géãç{éåxá CAPITAL REPLACEMENT RESERVE STUDY December 5, 2011 Copyright 2011 Design Management Associates, Inc.

2 Study Date: December 5, 2011 Prepared for: Creek s Edge at Stony Point Town Homes Homeowners Association, Inc. Steven Middleton President 9020 Stony Point Parkway Suite 225 Richmond, VA Prepared by: DMA Design / Management Associates, Inc East Main Street Richmond, Virginia Ph.: Fax: Dma-va.com Copyright 2011 Design Management Associates, Inc.

3 DMA December 5, 2011 Mr. Steven Middleton President Creek s Edge at Stony Point Town Homes Homeowners Association 9020 Stony Point Parkway, Suite 225 Richmond, VA Dear Mr. Middleton: On behalf of Design/Management Associates, Inc., I am pleased to provide you with this written documentation of our Capital Reserve Study for your community association. This report includes images of the data sheets that we use in conducting the Financial Analysis, and that we use during the working session. The data sheets are a dynamic resource that we can use to revise, adjust and re-analyze your reserve account and your funding options at any time. We hope that you will find this information useful in your budget planning and oversight over the next several years. This plan should be reviewed annually and updated every five (5) years at a minimum. The annual review will allow you to make any adjustments to the funding contribution, to adjust the study based on any actual capital component replacements that you make during that time, your actual funding, current inflation rates, interest rates, and changes to the condition of the community s assets based on a new on-site review. The five year update will provide for re-inspection of the components, evaluate the condition of the components and their remaining useful life, update the inventory of components, update the unit costs, update the inflation, interest and threshold factors and revise the funding model as needed. It is very important that you document each capital replacement expenditure made by the community. We recommend that you keep copies of all purchase orders, invoices, work contracts, specifications, warranty information, etc. that can provide accurate information on your replacement history, costs and future replacement expectations for each component. By providing this information to us for future updates, you can insure that future reports will be as accurate as possible. If you have any questions about this report, please feel free to contact me at any time. It was a pleasure working with you on this project and we look forward to being of service in the future. Sincerely, Douglas L. Greene, AIA, R.S. dlgreene@dma-va.com Copyright 2011 Design Management Associates, Inc.

4 TABLE OF CONTENTS 1. EXECUTIVE SUMMARY AND RECOMMENDATIONS PHYSICAL PROPERTY ANALYSIS FINANCIAL ANALYSIS METHODS FINANCIAL ANALYSIS FINANCIAL ANALYSIS SUMMARY SCHEDULE OF COMPONENTS HISTORIC FUNDING ANALYSIS EXPENDITURE RECURRENCE TABLE CASH FLOW METHOD ANALYSIS Ownership of Documents, Including Drawings, Specifications, Reports, Calculations, Design Notes, Field Notes Electronic Files, Data, Media, Software Programs And Other Related Materials: These documents are considered the intellectual property of DMA and shall remain the exclusive property of DMA and, where appropriate, shall be protected and copyrighted under the laws of the United States with all rights reserved. Creek s Edge at Stony Point Town Homes Homeowners Association (Client) is the only entity entitled to use these documents and only in connection with this project. Use of Electronic Files, Media, Software and Programs: DMA may transmit these documents as electronic files. DMA shall not be responsible for any viruses that may be transmitted with the electronic files, media, software or programs furnished to the Client. DMA shall not be responsible for any data erosion, erasure, alteration or failure of electronic files, media, software or programs that may occur at the time of transmission or over time. DMA makes no warranty as to the compatibility of the electronic files, media, software or programs with any operating system or programs. Acceptance and Agreement: By accepting there documents I hereby acknowledge that I have read and understood the terms and conditions of Ownership and Use set forth above and that as a duly authorized representative or agent of the Client, represent that the Client agrees to accept and abide by the same. Copyright 2011 Design Management Associates, Inc.

5 1. EXECUTIVE SUMMARY AND RECOMMENDATIONS COMMUNITY DESCRIPTION This is a gated community located on Creek s Crossing Boulevard, off Stony Point Parkway in Richmond, Va. Construction began in 2007, with 24 town homes completed by At build-out there will be 125 town homes and 15 detached villa style homes in total. The community includes a clubhouse and swimming pool which are built and in operation at this time. The community is being developed by Commonwealth Properties, LLC. Steven A. Middleton of Commonwealth Properties is the president of the Board of Directors. PURPOSE Your community has built or acquired infrastructure and amenities (capital assets) that are owned in common by all property or unit owners. Your homeowners association is responsible for replacing these assets when they wear out or become unusable. A capital reserve account is a savings account designed specifically to accumulate funds for eventual replacement of your commonly owned capital assets when they reach the end of their useful lives. Funds in this dedicated account can be accumulated over a period of many years without being taxed, however they can only be used for the repair or replacement of capital assets. They cannot, for example, be returned to the operating account without the association paying a penalty. Each capital asset is referred to in this study as a component of your Capital Reserves. All components eventually need to be replaced in full or in part, although they may normally function for 10, 20, 30 years, or longer. Regular operating and maintenance budgets do not cover the funding required for these needs. Therefore, separate funds must be accumulated over the life of the components. This Capital Reserve Study is designed to recommend the amount of money that should be deposited annually in your association's reserve account in order to adequately fund your reserves. A FUNDING PLAN - NOT A MAINTENANCE SCHEDULE This study is designed to anticipate the types of capital expenditures that are likely to occur over the life of the property. By doing so we can establish a reasonable and logical funding plan for the reserve account(s). While this plan can be used as a general predictor for replacement of components, it is not a specific required maintenance or replacement schedule. Specific decisions about replacement of each component should be made by the Board of Directors based on this information and on a periodic assessment of the actual condition of each component. INFORMATION PROVIDED BY THE ASSOCIATION Mr. Middleton provided drawings of the community, the clubhouse and pool, and existing town homes, along with preliminary drawings of a villa style home. Mr. Middleton also provided financial information on the existing capital reserve account. We were given access to all community facilities and visited the site on October 26 th and again on November 23 rd, FUNDING PLAN RECOMMENDATION This is an initial capital reserve study for this community. The community is currently under development with the majority of the infrastructure completed and about 17% of the planned 140 homes completed and occupied. This study includes projections, provided by the Developer, for 100% build-out of the community over the next five years as follows: Present: 24 homes completed and occupied 2012: 44 homes completed and occupied 2013: 68 homes completed and occupied 2014: 92 homes completed and occupied 2015: 116 homes completed and occupied 2016: 140 homes completed and occupied Our reserve funding recommendations are made on the basis of that schedule. If the actual percentage of new homes brought into the association varies materially, over this period, the projections should Copyright 2011 Design Management Associates, Inc. 1.1

6 be re-evaluated and adjusted. See the Financial Analysis Summary sheet for the values discussed in this analysis and recommendation. Our analysis begins with the estimated reserve account balance at the beginning of fiscal 2012 (January 1) of $36, The contribution to the account in 2011 was $8,400.00, or $ per home for the 24 existing homes. In our analysis, we used the following escalation factors for the future expenditure costs and for income from the account: Inflation cost escalation: 2.69% (based on past 5 year avg.) Projected interest earned on the account: 1.0% We performed a cash flow analysis (see the next section of this report) looking ahead for the next 50 years and arrived at estimated funding requirements over the period. Our projections for the first five years, during the build-out phase are as follows: Year Total Annual Annual Amount Per No. of Homes Amount Home 2012 $16, $ $25, $ $36, $ $48, $ $60, $ Our analysis showed that, in addition to increasing the number of contributing homes, it is necessary to increase the amount per home by an annual rate of 4.3%. This is partly due to the effects of inflation, but an increased funding level relative to inflation, will also be necessary to fund all expected component costs over this period. On a comparative basis with similar communities, we feel that a gradual increase in the amount per home is appropriate here. See the Financial Analysis Summary sheet for a graph showing the account performance over the 50 year period based on this plan. NOTES 1. Financial information including the present fund balance, interest from funds on deposit, and recent capital expenditures, were provided by the Association and are deemed reliable and complete by Design/Management Associates, Inc. 2. The condition of the reserve components is based on a visual inspection of each, conducted specifically for this study. All common areas on the property were observed. No destructive testing, lab analysis or other investigative methods are used to determine the remaining useful life of components. 3. Information provided by the Association about prior reserve replacement projects is considered to be reliable and complete. No inspection by Design/Management Associates, Inc. should be interpreted as a project audit or quality inspection. 4. Industry Life Expectancy is based on printed product literature, product or material warranties, industry standards literature, and on the opinions of manufacturers, installers, or maintenance contractors based on their experience with these products and materials. 5. Unit prices are based on published unit price standards such as R. S. Means "Residential Cost Data", Facilities Maintenance and Repair Cost Data, and "Facilities Construction Cost Data", latest editions, and on pricing obtained from contractors, installers, or manufacturers. All prices are given in present dollars unless noted otherwise. 6. This analysis incorporates an assumption about the future rate of inflation, and the future interest income on your account deposits. If significant changes occur in either of these rates, this calculation should be re-run with current information. 7. The results of this analysis are predicated on your contributing the recommended amount in each previous year and on expenses occurring generally as predicted. The account should be updated at least every 5 years to correct for normal variations. However if significant changes occur in your present funding or in major expenses, in a shorter period of time, the account should be re-run. 8. Design Management Associates Capital Replacement Reserve Studies are designed to be used as planning tools. They are a reflection of information provided by the Association and of our observations of the Association properties, and are assembled for the Association s use. This reserve study shall not be used for the purpose of performing an audit, quality/forensic analysis, or for background checks of historical records. Prices listed are not guaranteed as exact quotes for work included. Copyright 2011 Design Management Associates, Inc. 1.2

7 DISCLOSURE Design Management Associates does not have any financial interest in this community, its management company or any vendor mentioned or used in this study beyond this work. Copyright 2011 Design Management Associates, Inc. 1.3

8 2. PHYSICAL PROPERTY ANALYSIS RESERVE COMPONENTS DEFINED Components may include all types of property improvements which are owned by the homeowners association, or for which the association is required by the Declaration to provide maintenance. Examples would include any private roads, parking lots, sidewalks, paved trails, lakes, dams, swimming pools, tennis courts, playgrounds, clubhouses, etc. that make up the common area or shared amenities of the community. Other shared assets may include clubhouse or pool furniture, maintenance equipment and vehicles, or other miscellaneous assets like pumps, motors, generators, etc. Components may also include limited common elements of individual homes or lots, such as driveways, patios, decks, siding and roofing. In order to separate capital reserve components from maintenance components, we add the following conditions: 1. A capital reserve component will typically have an estimated service life of at least 3 years before it needs replacement. 2. Reserve Components will normally require replacement once or more during the normal life of the property. In this study, the life of a property is assumed to exceed 50 years. Reserve components are those improvements with a normal useful life of less than 50 years. 3. A capital reserve component should have a replacement value of at least $1, (Note: a capital reserve component may consist of several like components whose individual value may be less than $1, but whose aggregate value exceeds $1,000.00, if these components are likely to be replaced as a group. An example is clubhouse or pool furniture). A complete Schedule of Components for your community is provided on the data sheet entitled Schedule of Components that is included in your Financial Analysis section provided with this report. In this section of the report we briefly discuss each reserve component identified at your community. Each component was observed during our site visits. Our observation, together with any experience information that you or any of your contractors may provide, help us evaluate its useful life and projected replacement cost. The normal useful life of each component is based on its typical life cycle history, typical product warranties, our experience in construction, and most importantly, your experience with the component. We project the remaining useful life of each component on the basis of its present age and its present condition. MEASUREMENT AND QUANTIFYING OF COMPONENTS All components were viewed on site, unless otherwise specified herein. The components are documented with a photo of the component or of a typical component or group of components where there are a large number of repetitive component elements. Quantities for each component were developed either by on-site measurement, measurement from scale engineering and architectural drawings when available, measurement on scaled photos or measurement by satellite mapping. In the case of on site measurements of building envelope components (i.e. roofs, siding, trim, doors, windows, gutters, etc.) it would take an extraordinary amount of time and money to identify and measure each and every component on each and every unit. In that case quantities were arrived at by measuring a single model or a single unit of similar character and multiplying those quantities by the number of similar units. This methodology has resulted in very accurate results as far as quantities are concerned for the reserve study budgeting analysis. If this study is an update of a previous study performed by DMA or another consultant, the quantities used are as determined in that study, unless otherwise noted. In many cases where a recent historic estimate or bid exists the bid amount is used as a lump sum in lieu of a unit quantity estimate. Copyright 2011 Design Management Associates, Inc. 2.1

9 COMPONENT CONDITION ASSESSMENT AND PROJECTED USEFUL LIFE The observations and opinions expressed here are based on our general professional knowledge of construction and our knowledge of the typical replacement experience of many communities and other entities with the same component types. Our projections are not architectural or engineering recommendations for specific projects. The Board of Directors should seek professional or industry assistance for each specific replacement project, based on the conditions in existence at the time of replacement and as the need for replacement or repair becomes imminent ROADS The components in this section are for repaving your roads and alleys. All are relatively new as of this review, and are in excellent condition. You may also elect to do sealcoating every few years, however this is an optional preventative maintenance function not funded from the reserve account. Generally, replacement of the asphalt surface involves simple re-surfacing. This usually involves putting a new 1 ½" to 2" layer of asphalt over the existing surface. On rural roads, parking lots or driveways without curbs or with straight curbs, this can be done at least once with little impact on the road elevation relative to the adjacent grade. On roads with concrete curb and gutter, or on repetitive re-surfacing of older pavements, it will be necessary to mill down some or all of the old pavement before the new pavement can be installed - thus maintaining the existing road elevation. Complete milling generally adds about 50% to the re-surfacing cost, however we are projecting limited milling at the curbs, drain covers and any utility covers. Complete milling will be required in later years SITE INFRASTRUCTURE The following components are included in the site infrastructure. A brief description of the replacement function for each is provided below. All site infrastructure components except sidewalks were completed in 2009 and all are in excellent condition at this time. Concrete Curb and Gutter: All curbing consists of a combination of either vertical or roll-over curbing and a horizontal concrete gutter. These are long life components, and the majority of them should not be replaced during the 50-year window of this study. Over time, some problem areas are likely to occur however. This can be from soft ground support, undermining due to 2.01 ground water erosion, upheaval from tree roots, and breakage from vehicles driving over them. Funds are provided for replacement of a small portion of your curbs every few years. Copyright 2011 Design Management Associates, Inc. 2.2

10 Common Sidewalks: Sidewalks are being constructed at the time of building construction. They are finished of exposed aggregate concrete and are in excellent condition at this time. Like the curbs (above) these are long life components that will not require complete replacement during the study period. Typically, they suffer the same types of damage as curbs however, and some funding will be required over time for replacement of sections. Our projections are based on periodic replacement of a small percentage of the total planned sidewalk construction. Drainage Structures: This component specifically includes curb inlets and center street inlets for storm drainage. These generally are long life structures that should outlive the study period. Our experience in many communities, however, has been that some structures fail prematurely due to sub-surface erosion and lack of proper ground support. These need to be replaced when this occurs. Funds here can also be used for storm water piping which may suffer similar limited problems over time Retention Pond Trash Racks: A large storm water retention pond is located at the north end of the property. It is a dry pond and should not require any capital replacement work. We noted, however, that trees have been planted on the dam. This is dangerous on dams for lakes and wet ponds, as the tree roots weaken the soil. The same issue applies to dry ponds. We strongly recommend that you review this with your site engineer. The trash racks, located on the two outlet pipes at the dam, are constructed of galvanized sheet metal. These have a limited life span and will need to be replaced periodically. This component covers the cost of that replacement. Block Retaining Wall: There is a significant retaining wall of interlocking concrete block along the back side of the community. This wall appears to be in excellent condition. We have witnessed failures and partial failures in these types of walls, as well as any retaining wall, in other communities. We have included this component as a placeholder for future funding. Given its location and nonvisibility from on-site, we wanted to insure that it is recorded. We are not budgeting funds for any wall replacement during the period of this study and the replacement value will not impact any current funding, however this can be moved up in the future if any problems become apparent. Copyright 2011 Design Management Associates, Inc. 2.3

11 2.06 Perimeter Property Fence Replace Pickets: Above the retaining wall is a treated wood perimeter fence. This is a significant structure with 8x8 posts, 4x4 rails and 2x2 pickets. The pickets will probably fail before the main structure, and this component is for their eventual replacement. Perimeter Property Fence Replace Structure: This component is for the long term replacement of the posts and rails of this fence Street Lights: Street lights are provided throughout the community. This component is for long term replacement AMENITY INFRASTRUCTURE Clubhouse, Carwash and Mail Kiosk Metal Roofs: These are all factory painted steel standing seam roofs. Generally, the factory finish has a year warranty. We expect that it will last longer, but it will wear off eventually. Refinishing these roofs can be problematic, and can become a constant maintenance problem. We have budgeted for long term replacement of the roofs. Pergolas: The pergolas in the pool area and on the other side of the clubhouse, are treated wood. They are in good condition except that the stain finish is wearing off at this time. Restaining would be a maintenance expense. Our component is for long 3.04 term replacement Mail Boxes: There are six metal mailboxes with grouped individual boxes within them. These eventually suffer failures of movable components locks and door hinges. Repairs can be made, but eventually obsolescence and difficulty of matching parts will make replacement likely. Glazed Double Doors w/ Transom and Windows: The glazed doors are composite and the window frames and sashes are vinyl. All are in excellent condition. Replacement will occur when the insulating glass units begin to fail. Copyright 2011 Design Management Associates, Inc. 2.4

12 Interior Components: These include the Hardwood Floor, Dual Height Water Cooler, Restroom Fixtures, Toilet Partitions, Kitchen Appliances, and Casework. All of these components are in excellent condition at this time. They are included due to their cost. Generally communities replace these during general interior renovations, when the overall appearance may be deteriorating and a face-lift is desired to retain community marketability. HVAC Condensers: There are two condenser units here, with a typical service life of 15 years Pool and Deck: These include Pool Resurfacing, Pool Coping Tile replacement, and Pool Deck Pavers resetting / replacement. The pool has a cement plaster finish Marblelite or similar which wears down every few years and needs to be replaced. The pool coping tiles may need replacement over a longer time frame. The paver deck will likely need re-setting over time, but the pavers can be re-used Pool Fence: The pool fence is factory painted aluminum, in excellent condition. Aluminum fences have lower strength (and lower cost) than steel, and the finish will be susceptible to long-term damage from the chemicals in the pool water. Replacement is projected about every 25 years Outdoor Island Kitchen: This is a composite product containing several appliances and accessories. All will wear over time from weather, and the grill components will wear out from use. Replacement is expected about every 15 years. Copyright 2011 Design Management Associates, Inc. 2.5

13 3.20 Teak Pool Furniture: Teak wood is supposed to have a very long life, however our concern is with the assembly of the wood parts that will wear out from use over time. We are projecting a 25 year service life. Pool Filtration Equipment: These components include the Pentair TR140C Sand Filter, Biolab MA18 Chlorinator, and Sta-Rite Skimmers. These are the major components that need replacement over time. There are also two pumps, however they are under the $1, minimum replacement cost for capital items HOUSE COMPONENTS All of the components below are related to individual homes. Each heading is broken into five divisions with the projected number of contributing houses planned over the next five years included. Quantities of components on future units were derived from the typical unit styles and percentages in the plans available to us at this time. We do not know which units will be built at any given time, so actual quantities will vary somewhat from the calculated amounts. From a budgeting perspective these differences should not be material in size. These quantities can be adjusted either way over the next five year period based on actual construction and sales CONCRETE DRIVEWAYS REPLACE Concrete driveways like curbs and sidewalks discussed above should have a very long service life. Our experience in other communities suggests, however, that some driveways fail prematurely. This may be due to soil problems beneath certain driveways, construction of the driveway itself, poor concrete mix, or unusual stresses applied by vehicles or equipment during the service life. We have included an allowance for partial replacement of driveways over time. Copyright 2011 Design Management Associates, Inc. 2.6

14 5.00 FRONT WALKS / STEPS RESTORE The front walks and steps at each townhome are brick. Some current houses have brick walls in front as well. All brick walks and structures should have long service lives, however the open exposure to water and freezing conditions will eventually cause some cracking, settlement and mortar loss. We are funding for partial replacement / reconstruction of some units on a 25 year basis HOUSE ROOFS REPLACE / GUTTERS AND DOWNSPOUTS REPLACE The roofs on the existing houses are 30-year warranty dimensional asphalt shingles. We use the warranty life as the projected service life of these roofs. You may not replace all at one time, however the budgeting process is designed to insure that you have the funds available by a certain date. We have also scheduled replacement of the aluminum downspouts and gutters at the same time. In some cases, the life of these will exceed the roofing life. This can be adjusted in future updates as we see the condition of these elements over time WINDOWS All windows are vinyl sashes and frames with insulating glass units. The longevity of the vinyl will be dependent upon its resistance to UV rays from the sun. Insulating glass units will eventually fail, and these units are not designed to be replaced without replacing the sash. Over time, obsolescence will require full window replacement. Copyright 2011 Design Management Associates, Inc. 2.7

15 EXTERIOR SWING DOORS / OVERHEAD DOORS These components provide an allowance for partial replacement of entrance doors and garage doors on a recurring basis over time. Some units may outlast the window of this study PATIO / DECK ALLOWANCE Existing homes have brick patios. It appears that some future units may have decks instead of patios. This allowance is based on resetting patios or replacing decking on a recurring basis. Exclusions There are some improvements and assets related to the common areas of the community that are not included as capital replacement reserves. These are listed and explained below: Permanent Improvements This group includes components with projected life exceeding 75 years. This would generally include building structures such as the clubhouse, and certain durable component materials used in construction such as structural steel and structural concrete elements. Landscape Improvements. Replacement of any landscaping (trees, shrubbery, etc.) is generally not considered a reserve component. We often recommend that those costs be taken from the maintenance budget. Irrigation Systems Irrigation systems generally need continual maintenance. Broken heads and pipes, and damaged controller systems need to be replaced immediately upon failure. Replacement costs are generally below the threshold for reserve funding, and longevity of system components varies widely. We generally recommend that this system be handled within your annual operating and maintenance budget. However, if we do include this component in the capital reserve component list then we believe that there are major replacements that can be identified. Copyright 2011 Design Management Associates, Inc. 2.8

16 Homeowner Modifications On occasion home owners will modify components that are considered common elements and the responsibility of the Association. The cost of these modifications should not be included as part of the capital reserves. Painting, Wall Coverings and Other Cosmetic Work The interest earned on the account balance containing savings for certain components such as painting, wall coverings and other cosmetic work typically does not qualify for tax exemption under IRS rulings for associations filing Form 1120 or 1120H. The association should consult their tax consultant or accountant on this matter. At this time, you have created a separate operating maintenance account for exterior painting. Copyright 2011 Design Management Associates, Inc. 2.9

17 3. FINANCIAL ANALYSIS METHODS HOW MANY RESERVE ACCOUNTS? It is possible to maintain separate accounts for individual components or groups of components, and some communities have requirements in their Declarations for certain dedicated reserve accounts, such as for private roads. Many Certified Public Accountants recommend that the number of reserve accounts be kept to a minimum. We normally recommend that you keep just one combined (pooled) account. Having one account gives you the spending flexibility to respond to an unexpected expense in one component without having to transfer funds from other dedicated line item accounts. Unless otherwise noted in our funding recommendation, our study will develop one account with one annual deposit amount that will meet the replacement needs of all components. FINANCIAL ANALYSIS METHODS This study is designed to project the necessary annual allocation of funds needed to adequately fund your association's reserve account(s). The Community Associations Institute (CAI) defines several methods for determining this allocation. The first method is called Statutory Funding. Some states and localities have funding requirements based on local statutes. Your community is not located in a jurisdiction with this requirement; therefore the statutory funding method is not used here. The other methods include: Historic Funding Analysis The historic funding analysis provides a picture of the results of the historic funding contributions made by the Association over the years for each component since the time the component was placed in service or replaced. The amount of annual funding that should have been set aside each year for each component is calculated by dividing the original cost of the component by the components useful life. This is also commonly referred to as the annual straight line depreciation value. The amount of money for each of the components that should be in the capital reserve account as of the study date is computed by multiplying the required annual funding for each component by the study date minus the year the component was put in service. The total amount for all components divided by the actual reserve account balance yields the percentage that the account is fully funded. A 100 percent funding level means that the account is fully funded. A value less than 100 percent means that there may be a deficiency in the capital reserve account. Indeed, this method is often referred to as the full funding method. Further analysis methods often referred to as the component method would yield the contribution amount that needs to be made in order to catch up or the contribution amount that should be made in order to return to a full funding level. In our experience, most communities are not fully funded from their beginning date, and simple conversion to full funding will often place a higher cost burden on the present owners. Also, the full funding - component method must be recomputed every year. Gradually, the annual funding amount will be reduced over time as the Association catches up. It must be noted that this does not necessarily mean that the current annual contribution amount is insufficient to fund the reserve account from this point forward. The Association over the course of the years may have adjusted the annual contribution amount to where it is now adequate to fund the reserve account going forward if all funds are pooled into a single account. Cash Flow Method In this method, each anticipated component replacement is plotted on a schedule over time. This schedule then calculates the annual total reserve account deposits required to fund all projected component expenses and maintain a minimum account balance over the entire period. The minimum account balance is a variable that we can set as one of the following: Baseline Funding A baseline funding plan uses zero dollars ($0.00) as the minimum account balance. Threshold Funding This funding plan substitutes a threshold amount (minimum account balance) for zero. Typically, we derive the threshold amount from a percentage of the projected replacement costs for all your Copyright 2011 Design Management Associates, Inc. 3.1

18 reserve components - typically not larger than 5%. A percentage of the expected total reserve expenses over the next 10 or 20 years may also be used, or a fixed number could be selected. This amount creates a buffer to help keep the account above zero in the event of unusual or untimely expenses. The Cash Flow method balances out payments over the life of the property, which distributes the responsibility for reserve funding more equitably between present and future owners. STUDY PARAMETERS Several parameters have to be set prior to beginning the study, as they will affect the results. The following five (5) parameters are set at the beginning of this Study. The numeric value of each for your study is determined in the Financial Analysis Summary. They include: Actual Reserve Balance at the End of the Prior Fiscal Year This is a number provided by your Association, based on the contributions that you are presently making to your reserve account. If you do not have a reserve account, this number will be $0.00. The number that we put in becomes the beginning balance of the reserve account in year one (1) of our study. Anticipated Annual Inflation Rate This is based on historical and present day inflation data as it relates to various historical cost indexes. We use the current Consumer Price Index (CPI) and the Turner Construction Cost Index (most capital reserve components are related to construction materials and trades, rather than the overall economy). From these, we will recommend an inflation rate to use in the study. This number, expressed as a percentage (%) is input into the study in the Financial Analysis Summary. Annual Income Rate on Reserve Account We base this on your community s current and/or anticipated returns on investments from simple savings accounts to more complex fund investments. If funds are deposited in several different accounts, we will take an average of the earnings rate on all of the accounts. This number, expressed as a percentage (%) is input into the study in the Financial Analysis Summary. Target Minimum Allowable Balance As we have discussed above, the goal of the Cash Flow method is to design a funding plan that keeps your account above a minimum balance over the life of the study, while insuring that all components are fully funded when they are scheduled to be replaced. We can set that minimum balance at zero ($0.00), which we explained in the previous section of this report, is called baseline funding. We can also set a minimum allowable account balance, or threshold, at some amount above zero, in order to provide a buffer for the variations in actual expenditures that will inevitably occur over the life of the study. The percentage used for your study is input into the study in the Financial Analysis Summary. Annual Contribution Escalation The Cash Flow Method is designed to project an annual contribution that will keep the reserve account above a minimum balance in all 50 years of the study period. There are two ways that we use an annual escalation factor. 1. As inflation decreases the value of the dollar over time, it is necessary to introduce an escalation factor so that the contribution grows in relation to the growth in actual costs over time. If we did not do this - if we kept the contribution constant owners today would have to contribute a much larger amount in order to offset the declining value of the same contributions made in the future. The escalation rate provides parity for present and future owners. 2. In communities that are significantly under funded, it may be necessary to use an escalation factor that is significantly greater than the inflation rate to gradually increase your contributions to an acceptable level. The annual contribution escalation is expressed as a percentage (%) and is initially input into the study in the Cash Flow Method data sheet at the bottom of each ten year cash flow schedule. We can manually adjust this factor from year to year to help us design the appropriate funding plan. Copyright 2011 Design Management Associates, Inc. 3.2

19 4. FINANCIAL ANALYSIS GENERAL This study is designed to be published in either an electronic format or as a hard copy paper report. The data sheets included in the file are listed below. In electronic or hard copy format, each data sheet may require more than one page to illustrate the entire sheet. The sheets are titled: FINANCIAL ANALYSIS SUMMARY SCHEDULE OF COMPONENTS HISTORIC FUNDING ANALYSIS EXPENDITURE RECURRENCE TABLES CASH FLOW METHOD ANALYSIS We have provided a key which defines each of the elements (rows or columns) used in the data sheets. SCHEDULE OF COMPONENTS We have provided a key which defines each of the elements (rows or columns) used in the Schedule of Components data sheets: Component This column includes all reserve components that we identified in your community. Placed in Service This column identifies either our estimate of the year that each component was placed in service (built, installed, replaced, etc.). Replacement Interval This number is the expected working life of the component in years based on the actuarial or industry standard life combined with our observation of the condition and use of the component in this setting. Our EUL for a component in one setting may be different for the same or similar component in another setting. Percentage of Component to be Replaced Some components will require partial replacement over time, but will never require 100% replacement at the same time. To take this into account, we include a column in the schedule which adjusts the replacement cost by the percentage expected to be replaced. Expected Replacement Year This number is computed by adding the Expected Useful Life to the Year in Service. However, it can also represent an actual or expected replacement date that may come earlier than the computed year. Total Quantity This is the amount, size, number or extent of each component. Unit The units of measure used in this report are typically as follows: cy = Cubic Yard ea = Each lf = Linear Foot ls = Lump Sum sf = Square Feet sq = Square (100 square feet) sy = Square Yard zone = Irrigation Zone Unit Cost This is our estimate of the replacement cost per unit of each component. Replacement Cost Per Occurrence This number is derived form multiplying the estimated quantity x the unit cost x the percent replaced. At the bottom of the schedule the replacement costs per occurrence for all of the components are totaled. Copyright 2011 Design Management Associates, Inc. 4.1

20 EXPENDITURE RECURRENCE TABLES The Expenditure Recurrence Tables plot the expenditures for each component within the appropriate year when the expenditure is projected to occur. These entries can be over written when special circumstances have to be considered. HISTORIC FUNDING ANALYSIS We have provided a key which defines each of the elements (rows or columns) used in the Historic Funding Analysis data sheets: Component This column includes all reserve components that we identified in your community. Expected Annual Component Contribution This column gives the amount that should have been set aside for each component annually, from the Start Date (the date the component was put in service, or the beginning of the replacement cycle) in order to fully fund that component s replacement in the Expected Replacement Year. Expected Component Fund Balance In The Study Year This column calculates what your reserve fund balance for that component should be in order to be considered fully funded as of the Study Year. This number represents the total of all of the Expected Component Fund Balances in the Study Year. Actual Present Fund Balance This is the dollar amount that is actually in your reserve fund at the beginning date of the study period. % Fully Funded This number is arrived at by dividing the Actual Present Fund Balance by the Expected Fund Balance. If the actual balance matches the expected balance, the account will be 100% funded. If the actual balance is less than the expected balance, the account will be less than 100% funded. CASH FLOW METHOD ANANLYSIS The Cash Flow Method Analysis sets forth the expenditures, the annual balance, any special assessments that are in place or that might be considered, any other funds coming due, the amount earned on the deposits in the reserve account, any other disbursements that might be applied to the capital reserve account and the selected threshold balance. All fund balances are escalated to future dollars when appropriate. The funding objective simply tests the account balance to determine that the ending balance is above zero and that the minimum threshold account balance is equaled or exceeded. Expected Fund Balance Copyright 2011 Design Management Associates, Inc. 4.2

21 FINANCIAL ANALYSIS SUMMARY CREEK'S EDGE AT STONY POINT TOWN HOMES INCLUDES PROJECTED ANNUAL GROWTH TO 140 UNITS BY 2016 SUMMARY INPUT INFORMATION HISTORIC FUNDING ANALYSIS Study Date: November 2011 Total Annual Component Cost (Straight Line Depreciation): N/A Study Period Begins January 2012 Expected Reserve Account Balance: N/A Fiscal Year End Date: 31-Dec 2011 Year End Reserve Account Balance: N/A Year in Service (Default Year): 2009 Adequacy of Reserve Account (% of Full Funding): N/A Budgeted Contribution (2011): $8, /31/2011 Account Balance (estimated): $36, Number of Units in the Community: 140 * N/A : Not applicable to this community as it is still under development. (Unit = Assessed Home or Lot) *at build-out CASH FLOW METHOD ANALYSIS INPUTS CASH FLOW ANALYSIS 5 YEAR SUMMARY The following values have been used in the funding analysis: The Cash Flow Analysis, indicates the budgeted contribution amounts for the next five (5) years and the Selected Inflation Rate Study Period: 5 annual escalation to the contribution amount, if any: Anticipated Annual Inflation Rate: 2.69% Annual Income Rate on Reserve Account: 1.00% Contribution Escalation Rate for the Next 5 Years: 4.30% Minimum Acceptable Reserve Account Balance Based on: Selected minimum balance of: Year: 2012 Total Annual Contribution: $ 16, Per Unit: $ OR 5% X 2013 Total Annual Contribution: $ 25, $ Total cost for the next 20 years, equals: $11, Total Annual Contribution: $ 36, $ OR X 2015 Total Annual Contribution: $ 48, $ Total first occurrence cost, equals: $ Total Annual Contribution: $ 60, $ CASH FLOW METHOD ANALYSIS GRAPHIC SUMMARY The graph below illustrates the results of the Cash Flow Analysis based on the above information and the information provided in the Schedule of Components. The green bars indicate the reserve account balance at the end of each fiscal year over the study period. The red bars indicate the expenditures projected in each year of the study year period. Green bars below the $0 base line represent a deficit in the balance. $2,000,000 $1,500,000 $1,000,000 $500,000 $0 -$500,000 EXPENDITURES ACCOUNT BALANCE -$1,000, Copyright 2011 Design Management Associates, Inc.

22 SCHEDULE OF COMPONENTS CREEK'S EDGE AT STONY POINT TOWN HOMES COMMON ELEMENTS YEAR PLACED IN SERVICE, (CALENDAR YEAR) REPLACEMENT OR REPAIR INTERVAL, (YEARS) PERCENT OF COMPONENT TO BE REPLACED (%) EXPECTED REPLACEMENT YEAR, (CALENDAR YEAR) REMAINING USEFUL LIFE OR "YEARS PAST DUE" TOTAL QUANTITY UNIT UNIT COST REPLACEMENT COST, PER OCCURRENCE 1.00 ROADS - RESURFACE 1.01 Creek's Crossing Boulevard % , SY $8.50 $ 19, Creek Summit Circle % , SY $8.50 $ 59, Alley #1 (I,H,F,G) % SY $8.50 $ 5, Alley #2 (E,D,N,P) % SY $8.50 $ 6, Alley #3 (O,Q,R,S) % SY $8.50 $ 4, Alley #4 (U,T,V) % SY $8.50 $ 3, Alley #5 (M,L,K,C) % , SY $8.50 $ 16, Alley #6 ( W) % SY $8.50 $ 5, Alley #7 (X,Y) % , SY $8.50 $ 11, Fire Road % SY $8.50 $ 3, SITE INFRASTRUCTURE 2.01 Concrete Curb and Gutter % , LF $29.50 $ 28, Common Sidewalks % , SF $12.50 $ 13, Drainage Sructures % EA $3, $ 9, Retention Pond Trash Racks % EA $1, $ 2, Block Retaining Wall % , SF $75.00 $ 450, Perimeter Property Fence - Replace Pickets % LF $20.50 $ 10, Perimeter Property Fence - Replace Structure % LF $68.50 $ 35, Street Lights % EA $3, $ 100, AMENITY INFRASTRUCTURE 3.01 Clubhouse Roof % SF $ $ 18, Carwash Roof % SF $ $ 10, Mail Kiosk Roof % SF $ $ 1, Pergolas % SF $18.00 $ 9, Mail Boxes % EA $1, $ 9, Glazed Double Doors w/ Transom % PR $4, $ 18, Windows % EA $ $ 10, Hardwood Floor - Replace % , SF $13.00 $ 13, Water Cooler - Dual Height % EA $2, $ 2, Restroom Fixtures % LS $9, $ 9, Toilet Partitions % LS $1, $ 5, Kitchen Appliances % LS $8, $ 8, Casework % LS $1, $ 1, HVAC Condensers % LS $1, $ 1, Pool Resurface % , SF $7.50 $ 15, Pool Coping Tiles % LF $35.00 $ 5, Pool Deck Pavers % , SF $8.25 $ 19, Pool Fence % LF $32.00 $ 6, Outdoor Island Kitchen % LS $6, $ 6, Teak Pool Furniture % LS $25, $ 25, Pentair TR140C Sand Filter % EA $1, $ 1, Biolab MA18 Chlorinator % EA $1, $ 1, Sta-Rite Skimmers % EA $1, $ 4,500.00