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Reserve study primer for HOAs and Condo Associations


CondoAssociation.com on Thu, Jun 3, 2010 @ 10:30 AM


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reserve studyI'm the president of a national Reserve Study provider, and periodically get good questions from clients. So here goes: We recently had a question about Reserve projects with a zero remaining Useful Life. Is it the HOA Board's responsibility to replace the asset, even though it still "looks fine"?

Our answer was, "that depends". Reserve Studies are budget guides. There are multiple failure modes.

1) regular, gradual deterioration

2) watch and decide (benign)

3) technical or aesthetic obsolescence

4) surprise/critical failure

So it depends on the component how you should deal with projected failure. If the component is the single source of hot water for a large building (category 4), it is better to replace this component pro-actively, on schedule, than risk a holiday weekend failure. On the other hand, if it is simply the pool heater (category 2), there is usually no big deal about the pool being unheated for a few days or a week while a new heater is being installed. In that case, there is no harm in delaying replacement until the unit actually fails. Technical and aesthetic obsolescence (category 3) is a tougher call... when does something go out of style, and when should a security system be replaced with something more modern? We typically recommend replacing things on schedule that are category 1.

Hopefully you have seen these projects coming (a wood fence getting old, a building that needs painting, a roof that is showing wear/age, etc.), and typically boards have adjusted their evaluations on these components through the years as these assets age so the projections are usually pretty accurate, and doing them on schedule is appropriate. You are correct in that not making an anticipated Reserve expense delays the HOA spending some money. But if delaying a paint project leads to dry-rot, or delaying a roof replacement leads to water damage, delaying an expense actually leads you down the path of spending more money. Since Reserve expense projections are estimates, you need to realize that the times an expense comes in under budget offsets those times the expense comes in over budget. It is not like the association "wins" and is able to lower Reserve contributions if they are lucky enough to have an expense come in under budget or if an expense can be delayed a year. Those "good things" are necessary to offset the inevitable "bad things" that happen in this field of estimating. My counsel is for you to view Reserves in the big picture, on a multi-yr scale.

Adequate Reserve funding is an ongoing process. It is good to hear you are updating and adjusting this information annually. Take advantage of the "good" things that happen to strengthen your Reserves for the inevitable "bad" things that will happen.

Robert Nordlund

 

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