Are Common Area Infrastructure Assets Included?

By: Robert M. Nordlund, P.E., R.S.

All associations are "aging in place", and are moving forward towards the time they will have potentially major, unexpected expenses. But that is the issue. Can a budget plan, by definition, include events that are unexpected or unknown?

Our motivation, as is hopefully the motivation of all other Reserve Study providers, is to provide our clients with dependable disclosures and wise recommendations about how to prepare financially for the future. National Reserve Study Standards, released in 1998, dictate use of common terminology, content, and procedures in the preparation of a Reserve Study. These National Standards include the definition of a Reserve Component. Associations are better served due to the existence of National Standards, which provide more reliable and repeatable disclosures and recommendations, including less variance in what is considered a Reserve Component.

A Reserve Component is a common area maintenance responsibility that has a predictable life limit and a replacement cost above a minimum threshold amount. Common Area Infrastructure Assets are measured against this definition. This means we do not include items in the Reserve Study that are unknown (hidden in walls or under the ground), because they are by definition unknown in both cost and timing. In addition, “premature failure” (of any asset, not just a Common Area Infrastructure Asset) is not anticipated in a Reserve Study, because by definition premature failures are surprises.

We believe we are in violation of our industry standards, and do a disservice to our clients, by going into the "guessing game" of including significant components in the Reserve Study when we have no reasonable expectation how big or when those expenses will occur. Inclusion of such assets serves only to drive up contributions (and Reserve balances), drive down the Reserves "Percent Funded" rating, and diminish the reliability of both of these figures (since they are based on guesses, not consistent, repeatable decision-making standards).

Specifically with respect to Common Area Infrastructure assets, as soon as we spot a trend, or as soon as a client retains the services of a consultant to diagnose or authenticate concerns about the deterioration of an asset, we will be quick to include that component in the Reserve Study. We are not in the business of eliminating all surprises. A strong reserve funded position, established through a basis of highly predictable expenses, is an association’s best strategy to lessen the impact of financial "surprises". We are in the business of helping our clients responsibly plan for the expenses that can be anticipated, leaving them only exposed to special assessments when there are "true surprises".

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