Reserve Studies – it’s Not about Preparing for the Future

The standard comment we get from clients, prospects, and other industry professionals is that Reserve contributions are about “preparing for the future”. Well, they’re not.

Most of us have a mortgage. Some of those mortgages have a “balloon” payment at a future point in time. That is a future expense. Some of us with small kids in the house are anxious about college bills. That is a future expense. But physical deterioration goes on every day. One day a roof is new, the next day it’s not. After being installed new, it is a gradual, daily, observable progression towards the day it will fail. You don’t write the check for that deterioration until a future point in time, but the deterioration is accumulating on a daily basis nonetheless.

This is a theme you’re going to hear more from us about this year. It is the concept of making wise (not foolish) decisions, and the concept of an association’s “deterioration cost”. That cost of deterioration is as real as the electricity bill or the landscaper’s bill. If you don’t pay it one month, it doesn’t go away. It just gets added to the next month’s bill. And similarly, if you don’t pay it on time, you get a late fee. That is often the same with doing Reserve projects. If you don’t perform a Reserve project in a timely manner, it doesn’t go away, and it often gets more expensive (due to deferred maintenance).

So what’s your association’s “deterioration cost”? It is based on your size and your asset mix. Every day, all those assets are getting older, marching gradually towards needing to get replaced (or refurbished or repainted…). If you are contributing less than the deterioration cost, you have unfairly paid less than your share, and some poor sap in the future will be faced with paying your bill. That “deterioration cost” will float upwards in time over the years due to inflation, but it should remain relatively constant through the years. It’s just plain part of the cost of home ownership in your association. Associations that have historically underfunded their Reserves will likely need to contribute higher than their “deterioration cost” to play catch-up and prepare for a large roofing or painting expense. Associations with surplus Reserves should contribute less than their “deterioration cost” to gradually bleed off their surplus. But if an association is regularly contributing less than their “deterioration cost”, they are headed to special assessment land.

It’s not about Reserving for the future. It’s about keeping up with bills due to ongoing deterioration.

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