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Replacement Reserves
By: William I. Scrivens

To get started, how about a little history and background?

Over the past century, buildings and other facilities have become significantly more complex.  We may not realize it, but to name a few, plumbing, electrical, HVAC, fire protection, and energy systems on the scale we have today, are all relatively new. Additionally, new building materials and construction methods are constantly being developed, and this trend toward increasingly complex buildings and building systems is likely to continue.

Alongside increasing building complexity, we also have more complex ownership, including the proliferation of Home Owner Associations, Condominiums, Timeshares, and Cooperatives. It is with this shift towards complex ownership of increasingly complex facilities that a strong push towards a better understanding of the true cost of a facility has arisen.

Historically, a developer with reasonably well predicted costs purchased land and developed a facility. After the initial development and construction are complete, these facilities are historically maintained and operated on an annual basis. These operational and maintenance costs are either fixed or quickly migrate to predictable norms. However, long-term costs like roof replacement and the systems noted previously were not generally considered in any standardized way.

With the introduction of these complex ownership facilities, where an association of owners is now responsible for the governance of the facility, new concerns are raised. How can the funding for the long-term replacement costs of a facility’s common components be equitably distributed among the owners, and how can the upkeep of these common components be maintained?

Again these first concerns are:

1. Equitable distribution of cost based on use.
2. Maintaining the value of the facility.

In the mid 1980s, U.S. Department of Housing and Urban Development (HUD) recognized these issues and began to consider an equitable way to address them.

With this beginning, the idea of Capital Replacement Reserves was born.

During the 1990s the Foundation for Community Association Research took the lead and in 2001 published their Best Practices, Report #1, Reserve Studies/Management. It was followed by the National Reserve Study Standards and Reserve Specialist (RS) Designation by Community Associations Institute (CAI), last updated in 2011.

Presently, this has become an established industry with regional and national companies performing reserve studies, either as a side service or as specialized reserve study consultants. 

Now, in addition to the typical community association clients, there is a spill-over to new clients and in particular to churches and private schools. This makes sense; a building is a building, and a roof is a roof, and a building system is, well, you get the point. 

So, can and should your church or school take advantage of the standardized practice?

Before we get to that, let’s explore this a little further and look at what is in one of these studies and how they work.

Along with the increased complexity of buildings and ownership, the relatively recent introduction of computers and appropriate analytical methods allows us to consider complex issues in a quick and inexpensive way.

With this in mind, the National CAI Standards calls for the development of an inventory for a facility that includes units of measure, unit cost, useful life, remaining life, and replacement cost. 

Now this simple example has only 18 inventory items. In a real situation, an inventory may have dozens or hundreds of items. The number and range of inventory items is what makes these studies unique, and the proper modeling of issues such as age, replacement cycle, usage, and aesthetic preference makes the development of a proper inventory for a specific facility complex. 

These inventory items, however, with their associated costs and replacement cycles, constitute the building blocks of a reserve study, but this is just data and not particularly useful in the funding of replacement reserves.

But, what if we start looking at this inventory data over, say, a 30-year period? We could show projected funding in multiple ways. Some years may have many items and others none. These annual totals may be interesting, but they would not very useful in developing a long-term funding plan. We need one more step. 

The next step is to look at these annual expenditures in a cumulative model.

Modeling cumulative expenditures allows for cumulative funding. With this cumulative approach, anticipated long-term replacement costs can fit into any annual budget.

Now, replacements are funded as they are used and also equitably regardless of ownership.  Furthermore, from an educated position of understanding the long-term cycles and cost of the facility, any facility can be proactive and financially ready to maintain the identified elements of the facility. 

So then, how can Reserve Funding work for your church?

• Protect your worship and missionary calling with a fuller understanding of your secular responsibilities, including the predictable long-term costs associated with capital replacements.
• Keep your banquet and other facilities attractive and inviting, promoting their continued desirability and use.
• Practice true stewardship by understanding the funding needed to maintain the facilities bequeathed to your care. Show by example the practice of stewardship to your congregation, community, and major donors.

How about Long-Term Financial planning for your school?

• Keep education as the top priority, by developing a strategic plan and funding model for the replacement of your high-tech and traditional educational systems and infrastructure.
• Project all costs, including long-term capital replacement costs, equitably to your tuition fees and other revenue streams.
• Track and understand your facility better and all of its components and subsystems, so you can be in a proactive financial position with respect to your capital replacements.

In wrapping this up, more complex buildings and ownerships have resulted in a deeper understanding of facility costs and the equitable distribution of these costs. One of the ramifications of this evolution is that any facility can now approach their annual budget with a systematic understanding of their future capital replacement costs. 

It is no longer a question of when the roof replacement will be needed; that is predictable. But, rather, will your budget be on target as the inevitability of the roof replacement approaches? 

Capital replacement reserve planning will put your church and school budget in a position of financial strength by understanding the long-term costs of your facility.
William I. Scrivens, RS, is with Miller Dodson Associates, Inc., which is recognized nationally as one of the leading firms specializing in the Reserve Study field,

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