Protect Your Property Assets - Understanding The Reserve Fund Study (RFS)

Let’s explore Reserve Fund Studies - another mandated study by RERA that assesses the annual service charges, which I often get asked about. This week, our engineering team at Star Property Inspection have been completing these studies as part of their ongoing training. They are often connected to Building Condition Audits (BCA), which I have discussed in my previous articles.

So, what is a Reserve Fund Study, or ‘Sinking Fund Study’ as it’s often referred to?

It’s a physical, financial analysis that helps the Owners Association plan, and prepare, for likely repairs and/or replacements of the building’s major assets that may occur over its life cycle. In Dubai, we often complete this for a 20 year period, but we can do it up to 35 years for customers.

The Process

In advance of the inspection, the Owner’s Association is asked to provide the Asset Register for the building or community. Often, they struggle to obtain this and if it’s not available we may see it negatively affect the study’s results.

The physical assessment starts with a walk-through, similar to a BCA inspection. We will verify the key building assets against the Asset Register and it gives us an idea of their current condition. 

From this study, we will create a financial model of funds that are required to keep this property in a good, operational condition. Associated with this fund estimate, the study also identifies any funding gaps based on the current service charges, and ensures there will be no funding deficit.

Example of financial model.

Methods

There are several methods that can be used in the funding models. Such as, Fully Funded, Baseline Funded and Threshold Funded models. Most Dubai-based Owners Associations prefer the Baseline Funded Model (sometimes referred to as the Minimum Funded model) As the name suggests, this model requires the least reserve fund, so the target at the end of each year is to get the fund to 0 AED, or just above.

As I mentioned last week, I believe the BCA and RFS are essential tools for all building owners to understand and manage their building on an annual basis. Without this proper financial planning for potential major replacement and repair costs, a lack of maintenance can have a huge and negative impact on the overall valuation and operation of the building or community.

For further information, please email me at [email protected] for a complimentary discussion.

Are you financially prepared for the major repair costs for your building?