CCS CCS Reserve Studies & Capital Planning 2 — Questions and Answers
Question 1: A special assessment is typically levied when:
- The board wants to increase amenities for residents
- Reserve funds are insufficient to cover an unexpected major repair or replacement (Correct answer)
- A unit owner fails to pay monthly dues
- The annual audit reveals excess funds
Correct answer: Reserve funds are insufficient to cover an unexpected major repair or replacement
Special assessments are charged to unit owners when a major expense arises that the reserve fund cannot cover, often due to underfunding or an unexpected catastrophic event.
Question 2: Which capital planning document outlines the schedule of major projects, their costs, and how they will be financed over a multi-year horizon?
- Annual operating budget
- Capital improvement plan (CIP) (Correct answer)
- Depreciation schedule
- Audit report
Correct answer: Capital improvement plan (CIP)
A capital improvement plan (CIP) maps out all anticipated major projects, estimated costs, and proposed funding sources over a multi-year period, guiding reserve and assessment decisions.
Question 3: Inflation directly affects capital planning because:
- It lowers property tax assessments for the association
- The future cost to replace components will be higher than today's estimated cost (Correct answer)
- It reduces the interest earned on reserve investments
- It increases the useful life of common components
Correct answer: The future cost to replace components will be higher than today's estimated cost
Inflation causes the actual replacement cost at the time of replacement to exceed today's estimates, so reserve studies must incorporate an inflation factor in their 30-year projections.
Question 4: What is the risk to a condominium association of maintaining an 'underfunded' reserve (below 30% funded)?
- Automatic loss of the association's tax-exempt status
- Increased likelihood of special assessments, deferred maintenance, and difficulty obtaining FHA/VA financing for unit sales (Correct answer)
- Mandatory state takeover of the association
- Loss of the right to enforce the CC&Rs
Correct answer: Increased likelihood of special assessments, deferred maintenance, and difficulty obtaining FHA/VA financing for unit sales
An underfunded reserve can lead to deferred maintenance, costly special assessments, and loss of FHA/VA certification — making units harder to sell and potentially lowering property values.
Question 5: The 'threshold funding' method sets reserve contributions at a level that ensures:
- The reserve fund never drops below a predetermined minimum balance (Correct answer)
- Every component is 100% funded at all times
- The fund equals the total replacement cost of all components
- Contributions remain constant regardless of future expenses
Correct answer: The reserve fund never drops below a predetermined minimum balance
Threshold funding aims to keep the reserve balance above a set floor (the threshold) throughout the projection period, preventing the fund from going negative while minimizing contribution amounts.
Question 6: When a condominium association takes out a reserve loan to fund a major repair, what is the primary financial trade-off?
- Lower monthly assessments now but interest costs increase the total project expense (Correct answer)
- Higher reserves immediately but reduced insurance premiums
- Elimination of the need for future reserve studies
- Transfer of maintenance responsibility to the lender
Correct answer: Lower monthly assessments now but interest costs increase the total project expense
Borrowing spreads the cost over time and avoids a large special assessment, but interest charges mean the association pays more in total than if reserves had been adequate.
CCS CCS Reserve Studies & Capital Planning 2
A special assessment is typically levied when: