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The Negative Impact of Inaccurate Reserve Data

Introduction:

In the intricate world of condominium association management, the backbone of financial planning lies in the reserve study—a comprehensive evaluation determining anticipated repair and replacement costs over an extended period. This case study sheds light on the critical importance of accuracy in reserve studies and the consequences of overlooking the dynamic factor of inflation.


The Association in Focus:

Our case study revolves around a condominium association nestled in downtown St. Pete, boasting four towers, each with a flat roof, and a plethora of shared amenities, including two pools and eight elevators. With 136 items in their reserve study, it's safe to say this property's complexity demanded meticulous financial planning.


The Reserve Study Odyssey:

In 2018, the association embarked on a journey, commissioning a reserve study to decipher the financial roadmap for the years to come. The study provided a detailed spreadsheet outlining anticipated costs, with projections extending over a significant timeframe. Little did they know, this study would set the stage for a series of oversights.


The Resounding Alarm:

Fast forward to 2022, and the association, ever dutiful in their financial stewardship, sought a new reserve study to update their projections. To their astonishment, the numbers mirrored those from 2018, oblivious to the ticking clock of inflation. Enter our protagonist, an engaged observer with a knack for details, who questioned the static costs across the board.


The Inflation Oversight:

Upon closer inspection, it became apparent that the new reserve study merely replicated the figures from its predecessor, completely disregarding the impact of inflation. Elevators, once projected to cost $300,000 each to replace in 17 years, now faced a grim reality—nearly triple the initial estimate. The consequences of overlooking inflation were laid bare.


Compounding Consequences:

Compounding this oversight was the association's failure to grasp the power of compound interest. A missed opportunity to incrementally adjust costs over the years led to a sudden need for a 30% fee increase, sending shockwaves through the community.


Conclusion:

This case study serves as a cautionary tale for condominium associations navigating the intricate realm of reserve planning. The seemingly mundane task of updating a reserve study holds the key to financial stability. The resounding lesson here is clear—acknowledge the dynamic nature of costs, embrace the reality of inflation, and implement incremental adjustments to ensure a sustainable and secure financial future for your community.


Every decision we make with respect to our client's financial matters is with their best interest in mind.


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Reserve Fund Advisers, LLC., does not offer legal or tax advice. Please consult with your attorney, accountant, and/or tax advisor for advice concerning your financial circumstances.


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Investment advisory services offered through Reserve Fund Advisers, LLC, a registered investment adviser regulated by the State of Florida., Maryland, and Arkansas.


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