Resort Park Association

Resort Park Association

Villa Monterey Unit IV

Capital Reserve Study

Updated April, 2014

For Period Beginning: July 1, 2014

Ending: June 30, 2015

Date Prepared: April 11, 2014

Prepared by 2013/2014 HOA Board of Directors

Table of Contents

Executive Summary

Overview

Results

Specific to this study

Table 1 - Reserve Component List

Introduction, Objectives, and Methodology

FundingOptions

TheReserveStudy

DevelopingaComponentList

Preparing for the Reserve Study

Funding

Distribution of Accumulated Reserves

Terms and Definitions

Distribution of Accumulated Reserves

Funding Status Report

Cash Flow Specific Projections

Annual Expenditure Detail

Graphic Representations

APPENDIX A – Major Pool and Spa Equipment

APPENDIX B – Major HVAC Equipment

Executive Summary

Association: Resort Park Association, Inc.FD ID# 86-0335113

Location: 7667 E. Northland Drive, Scottsdale, AZ 85251

Contact Info: 480.990.2528 /

Number of Units: 144

Report Period: July 1, 2014 through June 30, 2015

Overview

Thisreserveanalysisstudyandtheparametersunderwhich it hasbeencompletedarebaseduponinformation compiled by andknowntothe association’s Board of Directors, its contractors, assorted vendors, and members of its community. The Board conducted a reasonably competent and diligent visual inspectionof the accessible areas of the major components that the association is obligated to repair, replace, restore, or maintain. Costswereobtainedfromnumerousvendorcatalogues,actualquotationsorhistoricalcosts, the National Association of Home Builders, and data from prior capital reserve studiesconducted by Reserve Data Analysis, Inc. This plan has been undated with an on-site inspection conducted by the Board in April, 2014.

Results

Projected Starting Reserve Balance...... $24,702

Contingency (Included in Reserve Balance)...... 3.00%

Recommended 2014/2015 Monthly Reserve Contribution...... $200

Recommended 2015/2016 Monthly Reserve Contributions...... $700

Annual Increase in Monthly Reserve Contributions Beginning 2016/2017...... 3.00%

Annual Inflation Rate...... 3.00%

Net “After Tax” Interest Earnings Accruing to Reserves...... 0.67%

Specific to this study

The Association’s clubhouse facility will be undergoing major renovations beginning 10/01/2014. These renovations will include, but are not limited to, upgrades to the interior and exterior, plumbing, electrical, windows, doors, roofing, installing ADA compliant entrances and restrooms, and the addition of a community kitchen. As a result of these renovations, several assets listed in the Component List (Table 1) are being replaced and/or upgraded to new status. Because the costs of replacement and/or upgrades to these assets are being included as part of the clubhouse renovations, these expenditures are not reflected in this reserve study. However, the costs of all subsequent replacements and/or upgrades to these assets been included based on remaining life terms.

Table 1 - Reserve Component List

Description / Useful Life / Rem Life / Current Average Cost / Future Average Cost
Concrete Components - Unfunded / 0 / 0 / 0 / 0
Entrance Walkway - Unfunded / 0 / 0 / 0 / 0
Granite Replenishment - Unfunded / 0 / 0 / 0 / 0
Roof - Tile - Unfunded / 0 / 0 / 0 / 0
Pool - Plaster & Tile Repairs / 10 / 1 / 2,500 / 2,500
Spa - Plaster & Tile Repairs / 10 / 1 / 2,000 / 2,000
Furniture - Clubhouse / 18 / 1 / 4,000 / 4,120
Water Feature (Fountain) Repairs / 10 / 1 / 1,000 / 1,000
HVAC - Wall Unity (B), Fitness Room / 10 / 2 / 500 / 515
Drinking Fountain / 14 / 2 / 600 / 618
HVAC - Wall Unit (A), Upstairs Office / 10 / 2 / 500 / 515
Pool / Outdoor - Furniture / 10 / 2 / 4,000 / 4,120
Fitness Room Equipment / 10 / 2 / 3,000 / 3,090
HVAC - Package Unit (B) - Office / 15 / 2 / 2,700 / 2,781
Pool - Deck, Resurface / 12 / 3 / 8,000 / 8,487
Pool Filter (B) / 15 / 3 / 800 / 849
Spa - Filter / 15 / 3 / 800 / 849
Paint - Exterior, Ramada/Cabana / 8 / 4 / 800 / 874
Pool - Pump Motor (B) / 10 / 4 / 500 / 546
Water Heater (A) / 11 / 4 / 400 / 437
Water Heater (B) / 11 / 4 / 400 / 437
HVAC - Package Unit (A) - Main / 15 / 4 / 3,500 / 3,825
Roof - Ramada / 20 / 4 / 1,200 / 1,311
Spa - Pump Motor / 10 / 5 / 1,000 / 1,126
Irrigation Controllers / 12 / 5 / 250 / 281
Office Equipment, Furnishings / 18 / 5 / 1,000 / 1,126
Spa - Heater / 10 / 6 / 2,300 / 2,666
Office Equipment, Computer / 7 / 7 / 1,500 / 1,791

Table 1 - Reserve Component List (Cont’)

Description / Useful Life / Rem Life / Current Average Cost / Future Average Cost
Pool - Heater / 12 / 7 / 3,000 / 3,582
Gates - Wrought Iron / 25 / 7 / 1,200 / 1,433
Paint - Exterior, Clubhouse / 8 / 8 / 9,000 / 11,069
Paint - Interior, Clubhouse / 9 / 9 / 4,000 / 5,067
Dishwasher / 9 / 9 / 500 / 633
Microwave Oven / 9 / 9 / 500 / 633
Ceiling Fans - Clubhouse / 10 / 10 / 600 / 783
Pool - Pump Motor (A) / 10 / 10 / 500 / 652
Roof - Clubhouse / 10 / 10 / 7,000 / 9,133
Walls - Blocks, Repairs / 25 / 11 / 3,000 / 4,032
Refrigerator / 13 / 13 / 1,200 / 1,711
Heater - Restroom / 15 / 15 / 300 / 454
Gas Range / 15 / 15 / 850 / 1,286
Pool Filter (A) / 15 / 15 / 800 / 1,210
Kitchen Counter Tops / 20 / 20 / 2,500 / 4,384
Light Fixtures, Interior / 20 / 20 / 1,500 / 2,630
Light Fixtures, Exterior / 20 / 20 / 1,500 / 2,630
Restroom Fixtures / 20 / 20 / 800 / 1,403
Shower Doors / 20 / 20 / 650 / 1,140
Doors / 25 / 25 / 4,000 / 8,131
Kitchen Cabinets / 30 / 30 / 5,000 / 11,783
Monument Sign - Letters / 30 / 30 / 400 / 943
Shower Enclosures/Modules / 30 / 30 / 1,200 / 2,828
Total Asset Summary / 93,250 / 123,414

Note 1: Future Average Costs based on 3% inflation compounded annually.

Note 2: Remaining Life estimates makes assumptions about current condition of certain components.

Introduction, Objectives, and Methodology

Preparingtheannualbudgetandoverseeingtheassociation'sfinancesareperhapsthemostimportantresponsibilitiesofboardmembers.Theannualoperatingandreservebudgetsreflecttheplanningandgoalsoftheassociationandsetthelevelandqualityofserviceforalloftheassociation'sactivities.

FundingOptions

Whenamajorrepairorreplacement is requiredinacommunity,anassociationhasessentiallyfouroptionsavailabletoaddresstheexpenditure:

Thefirstoption is topassa"specialassessment"tothemembership inanamountrequiredto coverthe expenditure. Whenaspecialassessmentispassed,theassociationhastheauthorityandresponsibilitytocollecttheassessments,evenbymeansofforeclosureifnecessary. However,anassociationoperatingonaspecialassessmentbasiscannotguaranteethatanassessment,whenneeded,will bepassed. Consequently,itcannotguaranteeitsabilitytoperformtherequiredrepairsorreplacementstothose majorcomponentsforwhichtheassociation isobligatedtomaintainwhentheneedarises.Additionally,whilerelativelynewcommunitiesrequireverylittleinthewayofmajor"reserve"expenditures,associationsreaching12to15yearsofageandolderfindmanycomponentsreachingtheendof theireffectiveusefullives.Theserequiredexpenditures,allaccruingatthesametime,canbedevastatingtoanassociation'soverallbudget.

Thesecondoptionisfortheassociationtoacquirea loan from a lending institution inordertoaffecttherequiredrepairs.Inmanycases,bankswill lend moneytoanassociationusing"futurehomeownerassessments"ascollateralfortheloan.Withthismethod,notonlyisthecurrentboardofdirectorspledgingthefutureassetsofanassociation,theyarealsorequiredtopayinterestfeesontheloanpaybackinadditiontotheoriginal principal.Inthecaseofa$50,000roofingreplacement,theassociationmayberequiredtopaybacktheloanoverathreetofiveyearperiod,with interests;whereas,iftheassociationwas settingasidereserves forthispurpose, using the vehicleoftheregularlyassessedmembership dues,it wouldhavehadthefulltermofthe lifeoftheroof inordertoaccumulatethenecessarymoneys. Additionally,thosecontributionswould havebeenevenlydistributedover theentiremembershipandwouldhaveearnedinterest aspartofthatcontribution.

Thethirdoption,toooftenused,issimplytodefertherequiredrepairorreplacement.Thisoptioncancreateanenvironmentofdecliningpropertyvaluesduetothe increasingdeferredmaintenanceandtheassociation'sfinancial inabilitytokeeppacewiththenormalagingprocessofthecommonareacomponents.This, inturn,canhaveaseriouslynegativeimpactonsellersintheAssociationbymaking it difficultorevenimpossibleforpotentialbuyerstoobtainfinancingfromlenders.Increasingly,manylendinginstitutionsarerequestingcopiesoftheassociation'smost recentreservestudybeforegrantingloans,eitherfortheassociation,aprospectivepurchaser,orfor anindividualwithinsuchassociation.

Thefourth,andonlylogicalmeansthattheboardofdirectorshastoensure its abilitytomaintaintheassetsforwhichitisobligated,uniformlydistributingthecostsofthereplacementsovertheentiremembership,isbyassessinganadequate levelofreservesaspartoftheregularmembershipassessment. The community is not only comprised of present members, but also future members. Any decision by the board of directors to adopt a calculation method or funding plan which would disproportionately burden future members in order to make up for past reserve deficits would be a breach of its fiduciary responsibility to those future members. Unlike individuals determining their own course of action, the board is responsible to the "community" as a whole.

TheReserveStudy

Therearetwocomponentsofareservestudy-aphysicalanalysisandafinancialanalysis.During thephysicalanalysis,areserveproviderevaluates informationregardingthephysicalstatusandrepair/replacementcostoftheassociation'smajorcommonareacomponents.Todoso,theproviderconductsacomponentinventory,aconditionassessment,and lifeandvaluationestimates.Afinancialanalysisassessestheassociation'sreservebalanceor"fundstatus"(measured in cashoraspercentfunded)todetermine arecommendationforanappropriatereservecontributionrateinthe futureknownasthe"fundingplan."

Reservestudiesfitintooneofthreecategories: 1)FullStudy;2)Update-withsiteinspection;and 3)Update-withoutsiteinspection.

InaFullreservestudy,thereserveproviderconductsacomponentinventory,aconditionassessment(baseduponon-sitevisualobservations),andlifeand valuationestimatestodeterminebotha"fund status"and"fundingplan."

•In anUpdate-withsiteinspection,thereserveproviderconductsacomponentinventory(verificationonly,notquantification),aconditionassessment(basedonon-sitevisualobservations),andlifeandvaluationestimatestodetermineboththe"fundstatus"and"fundingplan."

•In anUpdate-withoutsiteinspection,thereserveproviderconductslifeandvaluationestimatestodeterminethe"fundstatus"and"fundingplan."

DevelopingaComponentList

The budget process begins with an accurate inventory of all the major components for which the association is responsible. The determination of whether an expense should be labeled as operational, reserve, or excluded altogether is sometimes subjective. Since this labeling may have a major impact on the financial plans of the association, subjective determinations should be minimized. The following should be considered when labeling an expense:

OPERATIONAL EXPENSES occur at least annually, no matter how large the expense, and can be effectively budgeted for each year. They are characterized as being reasonably predictable both in terms of frequency and cost. Operational expenses includeall minor expenses which would not otherwise adversely affect an operational budget from one year to the next. Examples of Operational Expenses include:

1

Utilities:

• Electricity
• Gas
• Water
• Telephone
• Cable TV

Administrative:

• Supplies
• Bank Service Charges
• Dues & Publications
• Licenses, Permits & Fees

Services:

• Landscaping
• Pool Maintenance
• Street Sweeping
• Accounting
• Reserve Study

Repair Expenses:

• Tile Roof Repairs
• Equipment Repairs
• Minor Concrete Repairs
• Operating Contingency

1

RESERVE EXPENSES are major expenses that occur other than annually and which must be budgeted for in advance in order to provide the necessary funds in time for their occurrence. Reserve expenses are reasonably predictable both in terms of frequency and cost. However, they may include significant assets which have an indeterminable but potential liability which may be demonstrated as a likely occurrence. They are expenses that when incurred would have a significant effect on the smooth operation of the budgetary process from one year to the next if they were not reserved for In advance. Examples of Reserve Expenses include:

•RoofReplacements• PoolEquipmentReplacement

•Painting• PoolFurnitureReplacement

•DeckResurfacing• TennisCourtResurfacing

•FencingReplacement• ParkPlayEquipment

•StreetSlurryCoating• EquipmentReplacement

•AsphaltOverlays•InteriorFurnishings

•PoolRe-plastering•LightingReplacement

BUDGETING IS NORMALLY EXCLUDED FOR repairs or replacements of assets which are deemed to have an estimated useful life equal to or exceeding the estimated useful life of the facility or community itself, or exceeding the legal life of the community as defined in an association's governing documents. Examples include the complete replacement of elevators, tile roofs, wiring and plumbing. Also excluded are insignificant expenses which may be covered either by an operating or reserve contingency, or otherwise In a general maintenance fund. Costs which are caused by acts of God, accidents or other occurrences which are more properly Insured for, rather than reserved for, are also excluded.

Preparing for the Reserve Study

Once the reserve assets have been identified and quantified, their respective replacement costs, useful lives and remaining lives must be assigned so that a funding schedule can be constructed. Replacement costs and useful lives can be found in published manuals such as construction estimators, appraisal handbooks, and valuation guides. Remaining lives are calculated from the useful lives and ages of assets and adjusted according to conditions such as design, manufacture quality, usage, exposure to the elements and maintenance history.

By following the recommendations of an effective reserve study the association should avoid any major shortfalls. However, to remain accurate, the report should be updated every two to three years to reflect such changes as shifts in economic parameters, additions of phases or assets, or expenditures of reserve funds. The association can assist in simplifying the reserve analysis update process by keeping accurate records of these changes throughout the year.

Funding

From the simplest to most complex, reserve analysis providers use many different computational processes to calculate reserve requirements. However, there are two basic processes identified as industry standards: the cash-flow method and the component method.

The cash flow method develops a reserve-funding plan where contributions to the reserve fund are designed to offset the variable annual expenditures from the reserve fund. Different reserve funding plans are tested against the actual anticipated schedule of reserve expenses until the desired funding goal is achieved. This method sets up a "window” in which all future anticipated replacement costs are computed, based on the individual lives of the components under consideration.

The component method develops a reserve-funding plan where the total contribution is based on the sum of contributions for individual components. The component method is the more conservative of the two funding options, and assures that the association will achieve and maintain an ideal level of reserves over time. This method also allows for computations on Individual components in the analysis.

Once an association has established its funding goals, the association can select an appropriate funding plan. There are two basic strategies widely used by associations. It is recommended that associations consult professionals to determine the best strategy or combination of plans that best suit the association's need. Additionally, associations should consult with their financial advisor to determine the tax implications of selecting a particular plan. Further, consultation with the American Institute of Certified Public Accountants (AICPA) for their reporting requirements is advisable. The two funding plans and descriptions of both are detailed below.

Full Funding – Given that the basis of funding for reserves is to distribute the costs of the replacements over the lives of the components in question, it follows that the Ideal level of reserves would be proportionately related to those lives and costs. If an association has a component with an expected estimated useful life of ten years, it would set aside approximately one-tenth of the replacement cost each year. At the endof three years, one would expect that three-tenths of the replacement cost to have accumulated, and if so, that component would be "fully-funded." This model is important in that it is a measure of the adequacy of an association's reserves at any one point of time, and is independent of any particular method which may have been used for past funding or may be under consideration for future funding. The formula is based on current replacement cost, and is a measure in time, independent of future inflationary or investment factors:

Age of Component

Fully Funded Reserves------X Current Replacement Cost

Useful Life

When an association's total accumulated reserves for all components meet this criteria, its reserves are "fully-funded."

Threshold Funding - There are two goals of this funding method. The first goal is to make sure that all scheduled reserve expenditures are covered by keeping the reserve cash balance above zero during the projected period. The second goal is to reach and maintain a 100% fully funded reserve balance during the projected period. Depending on the association's current percent funded, it may take the entire projected period (typically 30 years) before the 100% fully funded level is achieved.

Reaching and maintaining a 100% fully funded reserve balance by uniformly distributing the costs of the replacements over time benefits both current and future members of an association, and is the best approach the board of directors can take to fulfill its fiduciary responsibility. The modified cash flow method creates a funding strategy that gives the membership the lowest reserve funding recommendation as possible over time, while approaching the 100% fully funded level.

Another advantage of the modified cash flow method is that the strategy is not based strictly on each component’s current funding status. The best funding strategy is one created that has consistent, incremental contribution increases from year to year. This very important aspect of the reserve study will aid the board of directors during the annual budgeting process.

Distribution of Accumulated Reserves

When calculating reserves based upon the component methodology, a beginning reserve balance must be allocated for each of the individual components considered In the analysis before the individual calculations can be completed. When this distribution is not available, or of sufficient detail, the following method is suggested for allocating reserves:

The first step the program performs in this process Is subtracting, from the total accumulated reserves, any amounts for assets which have predetermined (fixed) reserve balances. The user can "fix" the accumulated reserve balance within the program on the individual asset's detail page. If by error these amounts total more than the amount of funds available, then the remaining assets are adjusted accordingly. A provision for a contingency reserve is then deducted by the determined percentage used, and if there are sufficient remaining funds available.

The second step is to identify the ideal level of reserves for each asset. As indicated in the prior section, this is accomplished by evaluating the component's age proportionate to its estimated useful life and current replacement cost. Again, the equation used is as follows:

Age of Component

Fully Funded Reserves------X Current Replacement Cost

Useful Life

The next step is to arrange all of the assets used in the study in ascending order by remaining life, and alphabetically within each grouping of remaining life terms. These assets are then assigned their respective ideal level of reserves until the amount of funds available is depleted, or until all assets are appropriately funded. If any assets are assigned a zero remaining life (schedule for replacement this fiscal year), then the amount assigned equals the current replacement cost and funding begins for the next cycle of replacement. If there are insufficient funds available to accomplish this, then the software automatically adjusts the zero remaining life item to 1 year and that asset assumes its new grouping position alphabetically in the final printed report.

If at the completion of this task there are additional moneys which have not been distributed, the remaining reserves are then assigned, in ascending order, to a level equal to, but not exceeding, the current replacement cost for each component. If there are sufficient moneys available to fund all assets at their current replacement cost levels, then any excess funds are designated as such initially, but are then considered to be available reserves in the report funding computations.

Assigning the reserves in this manner defers the make-up period for any underfunding over the longest remaining life of all the assets under consideration, thereby minimizing the impact of deficiency. For example, ifthe report indicates an underfunding of$50,000, this underfunding will be assigned to components with the longest remaining life possible in order to give more time to "replenish" the account. If the $50,000 underfunding were to be assigned to short remaining life items, the impact would be immediately felt.

If the reserves are underfunded, the monthly contribution requirements as outlined in this report can be expected to be higher than normal. In future years, as individual assets are replaced, the funding requirements will return to their normal levels. In the case of a large deficiency, a special assessment may be considered. The program can easily generate revised reports outlining how the monthly contributions would be affected by such an adjustment, or by any other changes which may be under consideration.

Two contribution numbers are provided in the report, the "Monthly Membership Contribution" and the "Net Monthly Allocation." The association should contribute to reserves each month the "Monthly Membership Contribution" figure, when the interest earned on the reserves is left in the reserve accounts as part of the contribution. When interest is earned on the reserves, the interest must be left in reserves and only amounts set aside for taxes should be removed.

The second alternative is to allocate the "Net Monthly Allocation" to reserves (this is the member contribution plus the anticipated interest earned for the fiscal year). This method assumes that all interest earned will be assigned directly as operating income. This allocation takes into consideration the anticipated interest earned on accumulated reserves regardless of whether or not it is actually earned. When taxes are paid the amount due will be taken directly from the association's operating accounts as the reserve accounts are allocated only those moneys net of taxes.