CAI-NJ Nov. 2021(w)

Financial Health Check: How Does My Replacement Fund Stack Up? By Michael Mezzo, CPA, MBA, Wilkin Guttenplan

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W hether you have already been through it, or there is one lurking soon, capital projects are inevitable during mostboard members tenure. Key decisions made by the board may impact not only the success of the project but the future financial health of the association. While undertaking such a project can seem overwhelming, educating yourself on the ins and outs can help minimize the risk of a poor outcome and set your asso- ciation up for success. This article will provide an overview of some of the financial keys to ensure a successful project. The reasons for an association to undergo a major capital project vary. In some scenarios, a board may replace a component that is simply nearing the end of its useful life. However, some situations may be more dire, where boards need to address components that are actively deteriorating and posing a threat to the structural integrity of the building itself. Regardless of the reasons, whenever the need for a major capital project arises, one of the first steps a board should take is to evaluate the association’s financial health, and in particular, the health of the replacement fund.

When assessing an association’s financial health, there are a few easy places to look for reliable and timely information. Some key tools and information are included below: Financial Statements: An audited or internally pre- pared financial statement can provide a plethora of informa- tion regarding the current financial status of the association. Key amounts to look for are: 1. Reserves (Replacement Fund Balance): This figure rep- resents how much the association has accumulated over time for the purpose of significantly repairing or completely replacing existing common elements at the end of their useful life. 2. Cash and Investment Balances: This figure will provide detail on where the “replacement fund balance” dis- cussed above is held (i.e. savings and deposit accounts, certificates of deposit, money markets, etc.). Reviewing this breakout will provide information as to what portion of the association’s replacement fund assets are deemed to be “liquid”, in that they are readily available to be spent and are not tied up in long term investments. CONT I NU E S ON PAGE 16

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