Reserve Study News

A recent reserve study we performed for a 35-year old association highlighted the deficiencies of their prior reserve funding policies.  What we saw was an all-too-familiar scenario.

This association was not able to afford all of the deferred maintenance projects that needed attention. While they knew that special assessments or borrowing funds from a commercial lender were options, the board felt that these options were politically impractical, given the fact that this was a senior community and most members were on fixed incomes. What the board decided to do was to simply fund all of the maintenance projects that they could each year until they ran out of money.  This caused them to defer any uncompleted projects to the following year.  Unfortunately, the uncompleted projects continued to pile up, until further damage was caused by the failure of certain components.  This, in turn, caused future repair costs to escalate even further.

We have observed several associations over last 25 years attempting to fund their deferred maintenance projects in this manner. All suffered a very predictable ending. The fact is if you just spend the amount of money you’ve got available and not the amount of money it takes to actually complete a project, the projects never get completed as planned, and your deferred maintenance projects snowball into an insurmountable problem. This is not a plan, this is a reaction.

We strongly discourage such a reaction. We believe that a responsible board must make tough decisions rather than passing the buck to the successor board. That often means that a current board has to resolve problems created by a prior board. The fact is that you don’t get to play the cards that you want, you get to play the cards that you’re dealt. When the board is faced with a situation of not enough money coming in and too much money going out, there are only two possible solutions. One, increase revenues, or two decrease expenses.

An association may attempt to decrease expenses by making temporary repairs that extend the life of a component or by substituting lower-cost products in making repairs or replacements. Since most associations have already done this analysis and still are coming up short, the only remaining answer is to increase revenues. This generally means that the association must make a special assessment or borrow funds, or a combination of both.

One question that continually arises with respect to tile roofs is whether or not any reserve should be established for replacement of such roofs since the roofing material itself is considered to be a lifetime component. Our 20+ years of experience has shown us that while the roofing material may last a lifetime, the roof underlayment material is not a lifetime component. The underlayment material will typically last anywhere from 20 to 30 years before it loses its waterproof integrity. This happens because the material is either damaged by ultraviolet rays where they penetrate at the margins of the roof or the material simply becomes old and brittle and cracks, thereby allowing water to penetrate the building structure below.

As a consequence we do recommend establishing a reserve for replacing title roof underlayment on a 20 to 30 year cycle. Experience also shows us that tile breakage factors can range from 10% to 30% during the roof removal and replacement process. The net effect of this is that the removal and replacement process is roughly equivalent to the cost of installing a new roof.

We were recently hired to perform reserve study for a 27 year old association that has never retained an outside reserve professional to perform a reserve study.  All reserve studies for this association, and there were several of them, were performed by the property manager or a volunteer committee of members. Their prior reserve studies all shared one common factor; the projection period was for a 10-year period only.  The Association’s position was that “no one can predict anything beyond five to ten years with any degree of accuracy, so why bother to try and predict it at all?”

A group of concerned members finally prevailed upon the board to hire an outside professional (and that ended up being us) because they were concerned not all common area components appeared to be considered in the study.

Just using the information you provided and adding the couple of obvious component omissions, we plugged this into our software which utilizes a 30 year projection period rather than just 10 years. Based upon a continuation of the funding plan presently in place, we determined the Association would run out of reserve monies by year 17, unless it either borrows money or approves a very large special assessment.

This is the danger of looking at too short of a funding projection period. While a plan may work for the short-term, it doesn’t necessarily work for long-term. When you look at a longer term period you will often find that because expenditures vary so significantly from one year to the next that you can get a skewed picture of the health of your reserve fund by looking at just the shorter time period. Another way to have looked at this would be to analyze the percent funded on a year by year basis. What you would’ve seen in your case is that while there was sufficient funds available for the first 10 years the percent funded dropped significantly which was an advance indicator of problems to come.

While we agree that no one can predict exactly what’s going to happen 30 years from now, it is equally correct to state that no one can predict exactly what is going to happen 10 years from now. The fact is that a reserve study is a projection based upon a series of assumptions and virtually none of those assumptions will be exactly correct. However, the purpose of a reserve study is to create a plan to have approximately the right amount of money available at approximately the right time. You cannot do this with any reasonable degree of accuracy when you’re looking at only a 10 year period, given the long life of so many of the components that the association is required to maintain, repair, and replace.