The Building Reserve Fund Study

The Real Estate Regulatory Authority (RERA) sets specific guidelines and legislation concerning the management of jointly owned properties in Dubai. Defined as ‘the whole or part of a building or land, divided into units intended for separate ownership’1, jointly owned properties include apartments, villas, and whole communities sharing common areas. The overall building or land is typically managed by a firm appointed by the Owners Association (OA) to administer and operate the day to day tasks of maintenance, security, cleaning, finance and the like. RERA requires the OA or the OA manager to set budgets and establish two separate funds; the general fund and the building reserve fund, both contributed to by the owners through the service charge.

One of RERA’s requirements for service charge budget approval is a formal real estate reserve fund study. Further details on the actual methodology or composition of the real estate reserve fund study are not included however, the consultants carrying out the study must hold the ‘Property Observer’ trade license, signaling that they have sufficient experience in building construction and condition to understand the basics of the built environment being considered.

It should not be assumed that all firms with the license can undertake a building reserve fund study. It should be carried out by competent chartered surveying consultants with sufficient local experience, in accordance with international standards of practice, and tailored to suit the proclivities of Dubai. Use of foreign cost data is not recommended.

The building reserve fund study is generally used for future budgeting by property managers, and forms the cornerstone of forecasting of capital replacement costs. Overlooking its importance can lead to a deficit in capital for vital asset replacements.

In order to work out how much money needs to be saved to pay for building as their serviceable life expires in the future, a surveyor will gather all relevant data on the property via a two tier approach and assess the current condition of each asset. They will complete a comprehensive examination of factors including the asset type, its location and exposure, how well it was fitted, how well it has been maintained, and how these factors have affected the remaining useful life of the asset. This will then identify the year in which the asset should be replaced.

This forecast of life expectancy allows the surveyor to formulate a bespoke financial model, taking into account the current replacement cost and expected future cost, the effect of inflation and how this is offset by account interest accrued in the savings account. The objective is to reveal a forecast of expenditure over a time horizon of around 60 years and to show this as a 10 or 20- year window.

It is important that the clients FM team is involved in the process in order that an accurate statement of maintenance procedures and previous replacements are obtained. The FM and building management team also needs to understand how the model is established and used going forward. It should be understood that the cost model will be a forecast- albeit as accurate a forecast as can be established.

1. Mohamed Bin Rashid Al Maktoum, the Ruler of Dubai, “Direction for Association Constitution Issued in accordance with Law No. (27) of 2007 Concerning Ownership of Jointly Owned Properties in the Emirate of Dubai”, Dubai Land Department, Chapter One, Article Two, 2007