Teaching the Pros: Reserve Fund Planning and Reporting

By Jean-François (J.-F.) Proulx, CRP

When it comes to continued education, what are Canadian real estate professionals being taught about reserve fund planning and reporting? What challenges are present in both teaching and learning?

What is Being Taught?

Currently, we are teaching the Reserve Fund Planning and Reporting (RFPR) methodology established by Hans Moehring in the 1990s. RFPR is currently provided in five (5) modules:

The first module presents reserve fund planning, reporting, and management based on the performance of a corporation’s assets in the field.

The second reviews developments’ common assets, their initial construction and installations, their supply / distribution and disposal systems, what to pay attention to during a site-visit, and how to report on asset renewals.

The third module focuses on creating the active component inventory based on the functional lifecycle renewal costing analysis of components since construction, and over the economic life of the development.

The fourth focuses on translating a corporation’s component inventory physical analysis into a point-in-time benchmarked reserve fund position, and the ceiling amount of fiscal-year based annual regular contributions that the corporation must collect from owners.

The fifth module takes students through the report template. The benchmark, point-in-time, present-value-of-money standard results are put into a projection of schedulable expenditures over a specified horizon, in a sinking fund spreadsheet. In the fiscalyear after the current fiscal-year, the residual amount of missed contributions and depreciation needs is calculated, from which scenarios are produced and incorporated into the report.

Who is Being Taught?

REIC professionals, appraisers, engineers, technologists, lenders, shared-property stakeholders, and anyone interested in methodically understanding the risk associated with keeping a corporation’s common assets functional while owners gain real estate value. Single-family home owners; townhome owners; low to high-rise owners; phased and sectioned developments; corporate, governmental and institutional owners etc. – all can benefit from learning a standard method for normalizing fiscalyear draws on owners to meet a corporation’s irregular major repair and replacement expenditures.

What are the Learning Challenges?

Since the beginning of RFPR in the 1960s, there have been several competing schools of thought as to what constitutes the basis, merits, and practice of RFPR.

Some would stop analysis at current costs, excluding components that do not have schedulable expenditures past a certain number of years. Others extend a projection to capture some expenditures. Some would use the Consumer Price Index (CPI) rather than the Construction Inflation Rate (CIR), and others vary the rate over a projection. Some omit the Interest Income Rate (IIR) on the investments and monies in the reserve fund, others forgo the actual income on these restricted monies.

We also see some sacrificing the benchmark and its ability to establish a component inventory based on all the expenditures over the economic life of the development. Others produce it, but omit to disclose unit quantities and/or costs, or rely on design costs rather than renewal costs, and proceed to ignore its ceiling current requirements and ceiling allocation results.

Biases are pernicious, and the joy of teaching professionals is in seeing "the light go on" when the RFPR methodology begins to play itself out in their minds.

What are the Teaching Challenges?

There is inertia related to stakeholders wanting to hold on to their perspectives. A large part of the teaching involves breaking down unhelpful beliefs that professionals might have about managing assets and finances.

The course material is benefiting from adapting to attendees’ needs by shifting its current focus on reading and discussion lead by the teacher, along with some class activities, to adopting learning methods that rely on increased use of multimedia and interactive learning.

Mastering Microsoft Excel, creating component descriptions in Word, and producing reports that both fulfill legislative, methodological and reporting standards - and can easily be communicated to owners – is a challenge. A RFPR assignment is complex and can take several months to complete. To be effective, it must be aligned with a corporation’s critical fiscal-year budgeting and general meeting dates.

Getting students to grasp that full disclosure is for the benefit of all stakeholders, and that the value of a CRP designation is not just in the product – but also in the specialized services that RFPR practitioners bring to the table.

The Future of Reserve Fund Planning and Reporting

Reason will always want to play second-fiddle to a person’s control of the money in their pocket – unless we have standardized RFPR that owners can buy into.

RFPR is not about making an economic choice between two options based on prescriptive current costs. It’s about managing the risks associated with aging asset renewals – the corporation liability – when owners’ tenures are for less than the economic life of a development.

Being able to compare a corporation’s reserve fund decisionmaking over time and across space for several developments is the best way to ensure that component inventories are well structured, that resulting draws on owners are sound, and that buyers and lenders compare lots / units on the same footing. •

J.F. has construction, engineering, finances, strata living, as well as legal experience and expertise. He has worked for contracting, engineering and appraisal firms, and has degrees in Economics and Geography. He is also REIC faculty.