The 10-year reserve study
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.