STRATEGIC RESERVES

Reserve Studies Since 1990

Main Office P.O. Box 893009 Temecula, CA 92589-3009 Phone 951.693.1721 Fax 951.693.1731 vyww.src-reservestudy.com

Security of a Successful Plan

A Reserve Study Draft for

RANCHO PALOMA INC

Prepared for Fiscal Year 2011

April 09, 2010

J6

Contents
Preface Introduction Frequently Asked Questions I II Reserve Disclosures Cash Flow Analysis
n

"'
v

* 2-1
2

III IV V

Yearly Review Chart Disbursement Schedule Allocation Breakdown

~2

2-3

VI VII

Category Breakdown Chart Fully Funded Balance Breakdown n/a 6

VIII Component Cost Details

IX X XI XII

Field Report Appendix A- Assumptions Appendix B- Calculations Appendix C- Definitions 2009 Strategic Reserves Corporation All Rights Reserved. A B C

trategic Reserves Corp

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Preface
Strategic Reserves Corporation has conducted a reserve study per local statutes and/or governing documents (as applicable) to determine the reserve funding program at Rancho Paloma Inc. The individual responsible for Reserve Study preparation/oversight is Robert J. Petrisin, a CAI designated Reserve Specialist and state licensed General Contractor. Information contained in the report is considered reliable, but is not guaranteed. The report does not -warrant against the contingency ofunforseen conditions or circumstances, unreliable information, or an unpredictable inflationary or deflationary spiral. The report is not intended to predict precise expectations, but rather to chart the expectations that a reasonable person might anticipate in planning for the fiscal future. The scope of this report is expressly limited to the components described herein.

It is our recommendation that Rancho Paloma Inc have this reserve study report updated on an annual basis to ensure the security of a long-term funding plan. These necessary updates provide statutory compliance (as applicable) and allow for adjustments due to actual year-end inflation rate, actual year-end reserve balance and the unpredictable nature of the lives of many of the reserve components under consideration.

trotegic Reserves Corp

Introduction
Reserves provide the funding necessary to maintain, repair, replace or restore major common area components (such as paint, pavement and roofs) in the future. Ideally, all future reserve item expenditures will be covered by those funds currently set aside in segregated accounts as reserves. The plan involves a components study (or physical analysis) and a funding study (or financial analysis). The component study is a physical analysis of the major common area components. It consists of: component listing current cost estimate for each component useful life estimate for each component remaining life estimate for each component field report or condition assessment (applicable to Level 1 or Level 2 Reserve Studies) The first four elements of the component study play a pivotal role in the success of the long-term funding plan. They are, in essence the building blocks of the reserve study and form the foundation upon which the funding study is built. These items can be found on page 2 in the Reserve Disclosures section. Specific details related to each component can be found in the Component Cost Details section. The field report (if applicable) can be found in the Field Report section. The funding study is a financial analysis that utilizes the component study to determine: reserve allocation (proposed budget for next fiscal year) percentfunded (strength indicator) cashflow analysis (projection or forecast- a test of the allocation) Reserve Allocation is a significant part of the overall budget, and therefore, considered a critical element of the funding study. Various funding methodologies have evolved to determine this allocation, however, the component and cash flow methods dominate most reserve study reports. The component method determines reserve allocation by dividing cost by useful life for each component and then totaling. The straight-line method is similar, and determines reserve allocation by dividing the difference between fully funded balance and reserve balance by the remaining life for each component and then totaling. This method provides for 'independent funding' of each component. The cashflow method, on the other hand, determines reserve allocation by projecting reserve allocations and disbursements over a timeframe of thirty years and testing different allocations until a minimum allocation is found that maintains a Percent Funded or Net Reserve Balance amount above a specified funding goal (perhaps a Net Reserve Balance of zero dollars for Baseline Funding). This method provides for 'collective funding' of all components.

Strategic Reserves Corp

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Introduction
Independent of methodology utilized, the following represents the basic categories of funding goals: Baseline Funding- Maintaining a Net Reserve Balance at or near zero. Full Funding- Maintaining a Reserve Balance at or near Percent Funded of 100%. Statutory Funding- Maintaining a specified minimum Reserve Balance per statutes (if applicable) Threshold Funding- Establishing and maintaining a set Net Reserve Balance or Percent Funded Our reserve studies normally utilize the cashflow method to determine reserve allocation with a funding goal that is uniquely established by analysis of the association's physical and financial condition. The funding plan (or method/goal) utilized can be found on page I in the Reserve Disclosures section (under Parameters). The reserve allocation can also be found on page I (under Summary). Percent Funded is a comparison of the Fully Funded Balance (or the amount necessary to be 100% funded for all components based on cost and age) to the FY Start Reserve Balance, and provides a 'general indication' of reserve strength. This value can be found on page 1 in the Reserve Disclosures (under Summary). Although Percent Funded fluctuates from year to year in the Cash Flow Analysis, our own experience in the preparation of numerous reserve studies has revealed that a Percent Funded average of 70% and above normally indicates that reserves are strong and can be expected to fund future reserve component disbursements with 'low risk' of financial instabilities. Association management/members must realize that certain levels of risk are inherent in any long term funding plan. The plan must therefore provide a strategy that minimizes risk, while maximizing success. The cashflow analysis is a projection or forecast of expected allocations and disbursements over a timejrame of thirty years. Rates for interest earned, allocation increase and inflation are used in the analysis and these rates can be found on page I in the Reserve Disclosures section (under Parameters). Different allocations are tested for the proposed budget until a desired funding goal is achieved. Special attention must be paid to the Net Reserve Balance column to ensure it is positive in all thirty years. The Cash Flow Analysis can be found immediately following the Reserve Disclosures section. For potential buyers, understanding the reserve study is an important part of evaluating the value of the property being sold. For association members, proper reserve fund planning protects against declining property values due to financial instabilities that result in special assessments and/or deferred maintenance. A Strategic Reserves prepared reserve study conveys to owners and potential buyers a more accurate and complete picture of the association's financial strength and market value. The reserve study discloses to buyers, lenders, and others a long-term funding plan specifically designed to offset future reserve expenditures.
Strategic Reserves Corp ,V 4/9/2010

Frequently Asked Questions

1) What information should be distributed to all members? Simply photo copy the Reserve Disclosures section (conveniently located at the beginning of the report starting on page 1) and distribute it to all members of the association. This vital section provides the necessary disclosure information including: Reserve Allocation- the proposed budget for next fiscal year Percent Funded- a general indication of reserve strength Component Inventory- an estimate of current cost, useful life and remaining life 2) Where is a projection or forecast of the expected reserve allocations and disbursements over a timeframe of at least twenty years (a National Reserve Study Standard)? You 'II find it in the Cash Flow Analysis immediately folio-wing the Reserve Disclosures. Not only have we exceeded the minimum twenty year timeframe, but all thirty years are located on just one page - allowing for a comprehensive review. 3) There may be some of us who are not technically and/or financially savvy, and we simply fail to grasp the information provided in the Cash Flow Analysis. What should we do? From the Cash Flow Analysis, just turn the page to reveal the Yearly Review chart. This chart utilizes the same data found in the Cash Flow Analysis, but provides a visual presentation (or picture) of the data where trends are easily observed over the timeframe. 4) Our accountant wants to allocate specific reserve amounts to either categories and/or components. Arbitrary amounts have been allocated in the past. Do you offer a better approach? Yes- The Allocation Breakdown section provides a percentage breakdown of both the category and component. These percentages are provided specifically for accounting management purposes only and do not correlate with the cashflow method that provides for collective funding of reserves (since they are determined using the component method). 5) How can we focus in on the categories that comprise a significant part of the reserve allocation? Simply utilize the information provided in the Category Breakdown chart. It's sorted in descending order to reveal significant category domination. Association management can easily focus in on the top categories that comprise a significant part of the reserve allocation, to provide for the necessary inspection and maintenance intervals that will ensure/extend the component's useful life expectancy.

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Frequently Asked Questions

6) Where can I find helpful information, especially related to calculations and definitions? The last few pages of the report are reserved for appendixes. They are conveniently located in the back and offer important reference information that is quite helpful in understanding the report. The appendixes include: Assumptions- APPENDIX A Calculations- APPENDIX B DefinitionsAPPENDIXC

We strongly recommend using these appendixes to help you understand the reserve study report, but if you have additional questions and/or concerns regarding the report then please: A) visit our Report FAQ's web page online at: www.SRC-ReserveStudy.com B) email your question or concern to: info@SRC-ReserveStudy.com

travgic Reserves Corp

Reserve Disclosures
Name Location Units / General Type Base Year / Age Fiscal Year (FY) Ends Rancho Paloma Inc Cathedral City, CA 92234 22 / Planned Development (PD) 2006 / 4 December 31

Parameters
Level of Service Prepared for Next Fiscal Year (FY) Most Recent On-site Inspection Date Allocation Increase Rate Contingency Rate Inflation Rate Interest Rate / Tax Rate Interest Rate (net effective) Current Reserve Allocation Current Reserve Balance Funding Plan- Method / Goal Level 1 Full Reserve Study (With Site-Visit)

2011
April 2, 2010

5.2% 5.0% 3.0% 1.0% I 30.0% 0.7%

$5,531 per year $25,574 as of March 31, 2010

Cash Flaw / Threshold: average Percent Funded set at 70%

Summary
FY Start Balance Fully Funded Balance l*ereent Funded
Proposed Budget Next FY

$29.856

(projected to current FY End or next FY Start)

$38,416
78%
per year per month per unit per month

Reserve Allocation

$6,412

'

$534

$24.29-

Percent Funded is a comparison of the Fully Funded Balance (or the amount necessary to be 100% funded for all components based on cost and age) to the FY Start Balance, and provides a 'general indication' of reserve strength. Reserves are 78% funded. This general strength indicator may be interpreted in terms of risk associated -with the availability of reserves to fund future reserve expenditures and falls into the category of- 'Low Level of Risk'. The Reserve Allocation was determined using the Funding Plan indicated above under the Parameters section. This allocation should be increased annually using the Allocation Increase Rate of 5.2%. Association management should budget the Reserve Allocation amount toward reserves for next fiscal year, to ensure the availability of reserves to fund future reserve component expenditures. This amount reflects an increase of 15.9% from the Current Reserve Allocation. The Reserve Allocation must be reviewed and adjusted for inflation (and other vital factors) in succeeding years to ensure the- Security of a Successful Plan!
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Reserve Disclosures
Reserve Component Coat/Paint/Stain 001 gates, paint Equipment 002 bulletin board 003 fixtures, light,accent 004 gate operators 005 keypad system, gate 006 mailbox.CBU 007 phone system, entry Fencing 008 gate.entry, replace 009 walls.perimeter.repairs Pavement ' ......-:.::. SK: ;:: Sai 010 asphalt.major rehab 011 asphalt,repairs 012 asphalt,sealcoat/slurry 013 concrete, decorative, repairs Restoration 014 irrigation system, rehab 015 landscape.rehab 016 tree trim
Grand Total: 1 6 I (components)

Current Cost

Useful Life

Remaining Life
1 11 16 6 8 16 6

$578 $394 $1 ,890 $14,000 $788 $3,347 $2,625 $4,200 $3,245 $62,058 $2,165 $4,330 $5,107 $2,310 $2,310 $3,659 $113,004

15 20 10 12 20 10

25 30

21 26

25 10 5 25

21 6 1 16 16 6 1

20 10 5

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Cash Flow Analysis

s$

*? /
010

*/'/ ///
C
$29,856 . ' V .$27,654 ;. $34,593 $41,932 v i; $49,690 $57,892 $31,136 $40,046 $48,472 $58,430 '- $68;958 $67,684 $79,356 ;: : $91,693 $104,729 $118,500 $65,134 $80,020 $95,760 i $112,400 $128,564 $7,942 : $26,590 $46,335 $67,236 $89,353 $40,926 $65,168 $90,826 $117,974

.& r 1 |s , 5. : T ^ | . I t ...

1
$209

ii _
1

f I
?

/'

IS #:
15.9%

*l
;

. *r s> #$ V *

ef
$0
$8,823
$0 "'.

. c

f *

.M

$29,856 $27,654

M 11

/ 4
$30,042 $38,416 $38,178 $47,251 $56,835 $77,622 $52,388 $63,150, $73,484 $85,439

, >.<|

I 1
78%
72%

!011 !012 !013 !014 2015

$6,412 $6,746 $7,096 $7,465 $8,262

$194
$242 $294 $405

-2 5.2% 5.2%

S34;593 $41,932 $49,690 $31,136 $40,046 $48,472 $58,430 $68,958 $79,356 $91,693 $104,729 $118,500 $65,134 $80,020 $95,760 $112,400 $128,564 $7,942 $26,590
:

$0 $0

73%
74% 74% 75%

$348 .'-'.- . . , ' . . . ' $7,854

5.2%
5.2% 5.2%

'miis.

so '!' K
$35,423 $9 98
$

$57,892 . : ,$66,950

2016 2017 2018 2019

2020

$218
. $280 $339 $409 i / ' $483 $474 $555

$8,692 $9,144 $9,619 $10,119 $11,199 $11,781 $12,394 $13,038 $13,716 $14,430 $15,180 $15,969 :$ 16,800 $17,673 $18,592

5.2% - ;
5.2% 5.2% 5.2% 5.2% 5,2% 5.2% 5.2%

59%

.63%

$0 $0
$12,403
$0

66% 68% 70% 69% 71% 72%

74% 75% 62% 67% 70% 73% 76% 17% 43%

2021
2022 2023 2024 2025 2026 2027 2028 2029 2030
2031

$10,645 . 5.2%

$67,684 ;:::..";.y;: '$98,045 $98,556 $112,167 $126,506 $141,605 $157,495 $104;263 $119,742 $136,057 $153,242 $169,871 $45,498 $61,182 $77,766 $95,290 $59,346 $77,726 $97,155 $117,680

$0 $0 $0
$67,912 ;?;-::;/. $0

$642 ;/ :: $733 $830 $456 $560 $670 $787 $900

;; . si? ' 5.2% 5.2%

5.2% 5.2% 5.2%

$0 $0
$1,422 $139,195
$0
:-'.";:.' $0

2032 2033 2034 2035 2036 2037 2038 2039 2040

$56
v,:,'%tS6 $324
$471

$19,559 $20,576 $21,646 $23,956 $25,202 $27,891

;5.2%v ... ~ . .,;. ,

5.2%

$46,335 $67,236 $89,353 $40,926 $65,168 $90,826 $117,974 $146,691

$0 $0
"::/',.; $71,824

60%
71%

5.2%
5.2%

, $625 ,'; i;S -522,772 ; $286 $456 $636 ; $826

$113J95 ,::79%

5.2%
5.2% -

$0 $0 $0 $0

69% 84% 93%

100%

$26,512 : 5.2%

5.2%

0.7% -InterestRate 3.0% -Inflation Rate

Average Percent Funded: Minimum Percent Funded: Average Net Reserve Balance: Minimum Net Reserve Balance:
$70,056| $7,942|
4/9/2010

Strategic Reserves Corp

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YEARLY REVIEW)
$160,000 T Disbursementwith Percent Funded Comparison
90% T 100%

$140,000

$120,000

$100,000

$80,000

$60,000

$40,000

$20,000

10%

o%

YEAR
I Reserve Disbursement FY End Balance - Percent Funded

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Disbursement Schedule
Fiscal Year
2010
2011

Disbursement $0
$8,823

Disbursement Breakdown

$595 gates,paint $4,460 asphalt,sealcoaf slurry $3,769 tree trim

2012 2013 2014 2015 2016

$0 $0 $0 $0
$35,423 $690 gates,paint $3,134 phone system,entry $16,717 gate operators $2,585 asphalt,repairs $5,170 asphalt,sealcoat/slurry $4,369 tree trim $2,758 landscape,rehab

2017 2018

$0

$998
$998 keypad system,gate

2019

$0 $0
$12,403 $799 gates,paint $545 bulletin board $5,993 asphalt,sealcoat/slurry $5,065 tree trim

2020
2021

2022 2023 2024 2025 2026

$0 $0 $0 $0
$67,912 $927 gates,paint $4,212 phone system,entry $22,466 gate operators $3,033 fixtures,light,accent $5,372 mailbox,CBU

trategic Reserves Corp

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Disbursement Schedule
Fiscal Year Disbursement Disbursement Breakdown
$3,474 asphalt,repairs $6,948 asphalt,sealcoat/slurry $8,195 concrete,decorative,repairs $5,872 tree trim $3,707 irrigation system,rehab $3,707 landscape,rehab 2027 2028 2029 2030
$0 $0 $0

$1,422 $1,422 keypad system,gate $139,195 $1,074 gates,paint $7,813 gate,entry.replace $115,446 asphalt,major rehab $8,054 asphalt,sealcoat/slurry $6,807 tree trim

2031

2032 2033 2034 2035 2036

$0 $0 $0 $0

$71,824 $1 ,245 gates,paint $5,661 phone system,entry $30,1 92 gate operators $849 bulletin board $6,997 walls,perimeter,repairs $4,669 asphalt,repairs $9,337 asphalt,sealcoat/slurry $7,892 tree trim $4,982 landscape,rehab

2037 2038 2039 2040

$0 $0 $0 $0

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Component Cost Details

Reserve Component
Coat/PatntfStain linft 55 001 gates,paint approx 9.75x5.5 hgt x 2 pics (entry) approx 7.5x5.5 hgt x 2 pics (exit) approx 10x6 hgt x 2 pics (access gate within complex near mailboxes) Equipment /. 002 bulletin board 24"x36" 003 fixtures,Hght.accent entry area; in ground
18

Quantity

Unit of Measure

Unit Cost

Source Code

Replacement

%
100%

Extended Cost
$578

$10.00

each

$375.00

100%

$394

each

$100.00

100%

$1,890

004 gate operators #n/a;sn n/a- entry #CSW200ULDC3;sn4606N2158 (11/14/06)- entry #CSW200ULDC3;sn3906N6865 (09/29/06)- exit #CSW200ULDC3;sn4606N2157 (11/14/06)-exit 005 keypad system,gate Linear Access 006 mailbox.CBU CBU #3312 with pedestal #333395 007 phone system.entry Elite Entry Phone Fencing ,;
:

each

$3,333.33

100%

$14,000

each

$750.00

100%

$788

each

$1,594.00

100%

$3,347

each

$2,500.00

100%

$2,625

008 gate.entry .replace approx 9.75x505 hgt x 2 pics (entry) approx 7.5x5.5 hgt x 2 pics (exit) 009 walls,perimeter,repairs 146- adjacent to Converse Rd 266- adjacent to Plumley Rd Pavement 010 asphalt.major rehab 011 asphalt.repairs 012 asphalt.sealcoat/slurry 013 concrete.decorative.repairs 707- cul-de-sac area 4,697- entry area Restoration 014 irrigation system, rehab 015 landscape, rehab 016 tree trim 21-trees,other 20- trees, palm Strategic Reserves Corp

each

$1,000.00

100%

$4,200

412

I'm

ft

$75.00

10%

$3,245

34,362 34,362 34,362 5,404

sqft sqft sqft sqft

$1.72 $0.06 $0.12 $6.00

6 1 6 1

100% 100% 100% 15%

$62,058 $2,165 $4,330 $5,107

1 1 41

each each each

$2,200.00 $2,200.00 $85.00

1 1 6

100% 100% 100%

$2,310 $2,310 $3,659

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APPENDIX A

Assumptions
The parameters and assumptions under which this study was completed, is based on information provided by the association/client, its representatives, its management company (as applicable), its contractors, other contractors, specialists and independent consultants, the State Department of Real Estate (or other state agency, as applicable), the Community Associations Institute (CAI), construction pricing and estimating manuals, and the preparer 's own experience gained in the preparation of reserve study reports. The reserve funding program reflects assumptions about future events. Some may not materialize, and unanticipated events/circumstances may develop. Therefore, the actual component cost and/or remaining life of a reserve component may vary from the reserve funding program. The preparer of this report does not express an opinion on the probability that actual item cost and/or remaining life may or may not approximate the reserve funding program. It is assumed, unless otherwise indicated to the preparer, that all reserve items have been constructed properly, and that each estimated useful life -will approximate that of the norm per industry standards and manufacturers specifications. Arbitrary estimates may have been used on reserve components with an indeterminable but potential liability to the association. The decision for the inclusion of these reserve components, and other assets considered or not, is ultimately left to the association/client. The remaining life of the reserve components does not have a variance factor for unusual weather or natural disasters. It is assumed that a reasonable schedule of maintenance/repair will be conducted. The level of maintenance/repair any particular component receives may serve to prolong or shorten that components useful life. The actual life of any given component may vary due to quality of construction, original design, workmanship, intensity of use, maintenance/repair, and unusual weather. This study only addresses the maintenance and replacement of those reserve components listed, the associated costs/lives, and a reserve funding program. Various percentage rate factors are generally used in the Cash Flow Analysis. A low-conservative net effective interest rate is normally used to compensate for any applicable federal and state taxes imposed. The annual inflation rate is normally determined using the national "CPIU", the Consumer Price Index for all urban consumers in the United States. Because it is difficult to accurately predict these factors over time, it is vital to update them annually. Life-of-the-project items (e.g. building foundation/structure, concrete pavement, utilities, etc.) are generally excluded from this report. However, if the association has reason to expect the component to wear out or fail before the project does and if, due to the age of the units, the item may wear out within thirty (30) years, then that item should be included as a reserve component. Generally excluded are minor expenses which may be funded by a contingency and/or general maintenance/repair fund. Also excluded are expenses incurred due to acts of God, accidents, or other occurrences, which are more properly insured for.

Strategic S**rw Corp

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APPENDIX B

Calculations
1) Allocation % =
Reserve Allocation (Component Method) / Total Reserve Allocation (Component Method) x 100

2) Current Cost = Extended Cost (for a component without subcomponents) -orSum of subcomponent Extended Costs (for a component with subcomponents) 3) Extended Cost = Quantity x Unit Cost x Replacement % x (1+Contingency Rate) 4) Fully Funded Balance = Current Cost / Useful Life x (Useful Life - Remaining Life) 5) FY End Balance (same as Next FY Start Balance) = Initial fiscal yearCurrent Reserve Balance + Interest Earned + (Current Reserve Allocation /12 x Number of funding months remaining in current fiscal year) - Disbursements (for current fiscal year that are approved/in-process and/or unapproved/expected) Subsequent fiscal yearsFY Start Balance + Interest Earned + (Reserve Allocation (from previous year) x (1 + Reserve Allocation Rate)) - Disbursements 6) Interest Earned= Initial fiscal ^earCurrent Reserve Balance x (Interest Rate (net effective)/12 x Number of funding months remaining in current fiscal year) Subsequent fiscal yearsFY Start Balance x Interest Rate (net effective) 7) Percent Funded = (FY Start Balance / Fully Funded Balance) x 100
8) Reserve Allocation (Component Method) =

Current Cost / Useful Life

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APPENDIX C

Definitions
1) Abbreviations
bldgs = buildings ea = each FY = fiscal year If or lin ft = lineal feet RL = remaining life sf'= square feet sq = square (or 100 sf) UL = useful life %= percent

2) Age The approximate age of the complex. This parameter is provided for information only.
3) Allocation % A percentage of the total Reserve Allocation. See Calculations- APPENDIX B. 4) Allocation Increase Rate Expressed as a percentage rate that reflects the increase of a given year's Reserve Allocation over the previous year's Reserve Allocation and utilized only in the Cash Flow Analysis. 5) Base Year The year in which the governing documents were recorded and/or the buildings constructed (average year may be used for phases built over a period of time), and utilized to determine the approximate complex age. This parameter is provided for information only. 6) Common Interest Development (CID) Defined by shared property and restrictions in the deed on use of the property. A CID is governed by a mandatory Association of homeowners which administers the property and enforces its restrictions. The Association Board is responsible for repairing, replacing, or maintaining the common areas, other than the exclusive use common areas, and the owner of each separate interest is responsible for maintaining that separate interest and any exclusive use common area appurtenant to the separate interest. The following are two typical CID subdivision types: A) Condominium- In general, the recorded owner has title to the unit (or airspace). They are typically responsible for the interior of their individual unit/garage, all utilities that service their unit and any exclusive use common area associated with their unit (e.g. balcony, doors/windows, patio yard, etc.). B) Planned Development- In general, the recorded owner has title to the lot. They are typically responsible for the maintenance and repair of any structure or improvement located on their respective lot. 7) Component Inventory The task of selecting and quantifying reserve items. This task can be accomplished through on-site visual observations, review of association design and organizational documents, review of established association precedents, and discussion with appropriate association representatives. 8) Condition Assessment The task of evaluating the current condition of the component based on observed or reported characteristics and documented in the field report. 9) Contingency Rate Expressed as a percentage rate that reflects a factor added to the cost to prepare for an event that is liable to occur, but not with certainty.

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APPENDIX C

Definitions
10) Current Cost The current fiscal year's estimated cost to maintain, replace, repair, or restore a reserve component to its original functional condition. Sources utilized to obtain estimates may include: the association, its contractors, other contractors, specialists and independent consultants, the State department of Real Estate (or other state department as applicable), construction pricing and estimating manuals, and our own experience and/or database of costs formulated in the preparation of numerous reserve studies. See Calculations- APPENDIX B. 11) Disbursement The funds expected to be paid or expended from the Reserve Balance. 12) Extended Cost See Calculations- APPENDIX B. 13) Fiscal Year (FY) A 12-month period for which an organization plans the use of its funds. There are two distinct types: A) Calendar Fiscal Year (ends December 31) B) Non-Calendar Fiscal Year (does not end December 31) 14) Full Funded Balance Total Accrued Depreciation. An indicator against which the FY Start Balance can be compared. The balance that is in direct proportion to the fraction of life "used up" of the cost. See Calculations- APPENDIX B. 15) Funding Goal Independent of methodology utilized, the following represents the basic categories of funding plan goals: A) Baseline Funding- Maintaining a Net Reserve Balance at or near zero. B) Full Funding- Maintaining a Reserve Balance at or near Percent Funded of 100%. C) Statutory Fundins- Maintaining a specified minimum Reserve Balance per statutes. D) Threshold Funding- Establishing and maintaining a set Net Reserve Balance or Percent Funded. 16) Funding Method (or Funding Plan) An association's plan to provide income to the reserve fund to offset expected disbursements from that fund. The following represents the basic methodologies used to fund reserves: A) Cash Flow Method- A method of developing a reserve funding plan where allocations to the reserve fund are designed to offset the variable annual expenditures from the reserve fund. Different reserve funding plans are tested against the anticipated schedule of reserve expenses until the desired funding goal is achieved. B) Component Method- A method of developing a reserve funding plan where the total reserve allocation is based on the sum of allocations for individual components. 17) Funding Plan The combined Funding Method & Funding Goal. 18) FYEad Balance (same as next FY Start Balance) The balance in reserves at end of applicable fiscal year. See Calculations- APPENDIX B.
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APPENDIX C

Definitions
L9) FY Start Balance (same as prior year FY End Balance) The balance in reserves at start of applicable fiscal year. 20) Inflation Rate Expressed as a percentage rate that reflects the increase of this year's costs over the previous year's costs. Also known as a 'cost increase factor'. 21) Interest Earned The annual earning of reserve funds that have been deposited in certificates of deposit (CDs), money market accounts or other investment vehicles. See Calculations- APPENDIX B. 22) Interest Rate The ratio of the gain received from an investment and the investment over a period of time (usually one year), prior to any federal or state imposed taxes. 23) Interest Rate (net effective) The ratio of the gain received from an investment and the investment over a period of time (usually one year), after any federal or state imposed taxes. 24) Levels of Service A) Level 1 Reserve Study (Full or Comprehensive)- A Reserve Study in which the following five Reserve Study tasks are performed: a) Component Inventory b) Condition Assessment (based upon on-site visual observations) c) Life and Valuation Estimates d) Fund Status e) Funding Plan B) Level 2 Reserve Study (Update. With-Site-Visit/On-Site Review)- A Reserve Study update in which the following five tasks are performed: a) Component Inventory b) Condition Assessment (based upon on-site visual observations) c) Life and Valuation Estimates d) Fund Status e) Funding Plan *Note- Updates are reliant on the validity of prior Reserve Studies. C) Level 3 Reserve Study ('Update, No-Site-Visit/Off-Site Review)- A Reserve Study update with no on-site visual observations in which the following three tasks are performed: a) Life and Valuation Estimates b) Fund Status c) Funding Plan *Note- Updates are reliant on the validity of prior Reserve Studies. 25) Percent Funded A comparison of the Fully Funded Balance to the FY Start Balance expressed as a percentage, and used to provide a 'general indication' of reserve strength. See Calculations- APPENDIX B.
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APPENDIX C

Definitions
16) Quantity The number or amount of a particular reserve component or subcomponent. 27) Remaining Life (RL) The estimated time, in years, that a reserve component can be expected to continue to serve its intended function. Projects anticipated to occur in the current fiscal year have a remaining life of "zero". 28) Replacement % A percentage of the total replacement for a particular reserve component or subcomponent. This parameter is normally 100%. 29) Reserve Allocation The amount to be annually budgeted towards reserves based on a Funding Plan. 30) Reserve Component (or subcomponent) The individual line items in the reserve study, developed or updated in the physical analysis that form the building blocks of the reserve study. They typically are: A) association responsibility, B) with limited useful life expectancies, C) predictable remaining useful life expectancies, D) above a minimum threshold cost, E) and, as required by statutes. 31) Restoration Defined as to bring back to an unimpaired or improved condition. General types follow: A) Building- In general, funding utilized to defray the cost (in whole or part) of major building components that are not necessarily included as line items and may include termite treatment. B) Irrigation System- In general, funding utilized to defray the cost (in whole or part) of sectional irrigation system areas including modernization to improve water management. C) Landscape- In general, funding utilized to defray the cost (in whole or part) of sectional landscape areas including modernization to improve water conservation & drainage. 32) Risk Factor The associated risk of the availability of reserves to fund expenditures by interpreting the Percent Funded parameter as follows: A) 70% and above- LOW B) 31 % to 69%MODERA TE C) 30% and below- HIGH

Strategic Reserves Corp

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APPENDIX C

Definitions
E3) Source Code The source of information utilized to obtain cost and/or life estimates. 0- Actual Cost 1- Arbitrary Estimate 2- Architect/Engineer 3- Association 4- Bid/Proposal 5- Builder/Developer 6- Contractor 7- Cost Estimating Manual 8- Industry Standard 9- Manufacturer 10- Prior Reserve Study 11- Reserve Study Firm 12- Specialist/Expert 13- Vendor/Rep 34) Unit Cost The current fiscal year's estimated cost to maintain, replace, repair, or restore an individual "unit of measure" of a reserve component or subcomponent to its original functional condition. 35) Unit of Measure A system of units used in measuring a reserve component or subcomponent (i.e. each, lineal feet, square feet, etc.). 36) Useful Life OIL) Total Useful Life or Depreciable Life. The estimated time, in years, that a reserve item can be expected to serve its intended function if properly constructed and maintained in its present application or installation.

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12/11/09 Attn: Board of Directors RANCHO PALOMA, INC. RE: Reserve Study Proposal Dear Members of the Board:

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STRATEGIC Tf RESERVES
Reserve Studies Since 1990

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Strategic Reserves is appreciative of this opportunity to present a reserve study proposal. The following information outlines the core strengths of our reserve study funding plans. Key fundamentals that provide for the success of a long-term funding plan include: the ability to select a funding method - Cash Flow or Component theflexibilityto utilize several funding goals - Baseline, Full or Threshold development of a funding plan (method/goal) that is uniquely established by our expert engineering analysis of the association 's current physical and financial condition. compliance with the National Reserve Study Standards, AICPA Audit Guidelines & California Civil Code 1365. Simply photocopy the Reserve Disclosures (conveniently located at the beginning of each report) and distribute to association members along with the pro forma operating budget at fiscal year-end. comprehensive field reports conducted by our licensed General Contractors that provide condition assessment, maintenance suggestions, alternative materials and digital color photos. Assessment and Reserve Funding Disclosure Summary form completion per AB 2100 & AB 2718 We understand the need for client protection in today's environment, and therefore provide: SI ,000,000 General Liability insurance policy $1,000,000 Professional Liability insurance policy (Errors & Omissions) Our commitment to this industry provides for client confidence with credentials that include: Member, California Association of Community Managers (C ACM) Member, Community Associations Institute (CAI) Reserve Specialist (RS) Designation from CAI State Licensed General Contractors Certified Playground Safety Inspectors Degreed Engineers with emphasis in "Budgetary Forecasting" & "Long Term Strategic Planning" The philosophy at Strategic Reserves is built on a solid foundation of complete customer satisfaction, our #1 priority, and direct association management input, the key to our success. Get us started- Today! Simply sign the ATTACHED contract & fax to our office at 949.552.9010. Thank you! Sincerely,

Jim Mavrinac Irvine Office

Main Office P.O. Box 893009' Temecula,CA 92589' 951.693.1721 Fax-951.693.1731' ittfo@SRC-ReserveStuofy.com W Irvine Office 14252 Culver Drive, #600 Irvine, CA 92604 949.552.9009 Fax-949.S52.90IO jmtnrinac@SRC-ReserveStudy.com ww.Jtef grveStudySqftware.com

CONTRACT
(Important: contract not valid unless signed + dated) Level 1 Reserve Study flfalk with Site-Visit/On-Site Review) '^,....~.
A Reserve Study in which the following five Reserve Study tasks are performed: Component Inventory Condition Assessment (based upon on-site visual observations) Life and Valuation Estimates Fund Status Funding Plan Level 1 Reserve Studies comply with California Civil Code 1365.5(e) which states: "At least once every three years the board of directors shall cause to be conducted a reasonable competent and diligent visual inspection of the accessible areas of the major components which the association is obligated to repair, replace, restore, or maintain as part of a study of the reserve account requirements of the common interest development... " _

Our professional reports include:

1) 2) 3) 4) 5) 6) 7) Site- Visit conducted by licensed general contractors- 'Qualified Personnel ' capable of this vital task! digital color photos of problems observed during Site-Visit - additional fee of $350 for entire component inventory Q 30-year Cash Flaw Analysis- All on one page for a comprehensive review! direct association management input and rough draft review (of at least 30 days) prior to completion one rough draft revision prior to completion (additional revisions billed @$100 per revision) an electronic version via email or CD (bound hard copies are available upon request @S15 per copy) **Reserve Disclosures per California Civil Code Section 1365 (including the 'Assessment & Reserve Funding Disclosure Summary 'form completion per AB2100)...@ NO ADDITIONAL COST!

Note: quoted pricing is valid for 12 months! (from date of proposal) What we require:
1) to expedite a draft report (delivered within 10 business days of our receiving all key info!)- simply double listed cost ] 2) 50% retainer with balance due (60 days net) upon rough draft submittal (100% retainer for Level 3) a. Late payment finance charges- annual interest rate is 10% with $25 minimum finance charge 3) current reserve allocation per year and current reserve balance (most recent month-end) 4) governing documents and fiscal year-end month & day (new clients only) 5) list of major projects that completed or are about to complete with cost & year (i.e. Reserve Log) 6) most knowledgeable on-site contact name (with phone number + email) and keys/codes to access secured areas 7) directions to the complex (or mailing address within the complex to utilize MapQuest online service) 8) to attend Board/Committee meeting (meetings scheduled during Site-Visit are free!) - additional fee of $200 O 9) to specifically list the association as Additional Insured - additional fee of $100 per entity name Q 10) to cancel a signed contract - 25% of the contracted amount ($200 minimum) Mfl9 (795-841) Level of Service indicated (check the appropriate box above) & Accepted by (complete below)-

Print Name: ~TeJZgt

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Print Officer Title (Pres / Seer):

_ Date: 3 _ / XJT / l^a/ Q

A more, comprehensive proposal may be viewed on our website at http://ww. src-reservestudv. com/pdl/Proposal.pdf Product sample is available upon request by contacting us via email- infoGvsrc-reservestudv. com
-Additional info & products (workbooks/software) may be found on our website at httt>://www.src-reservestudv.com_

Strategic Reserves Corp P.O. Box 893009 Temecula, CA 92589 - 9S1.693J72J . Fax-9Sl.693.1731