Why Reserve for 30 yrs instead of 20 yrs (or less)?

It is true that accuracy of Reserve projections increases as the projected expense approaches. An expense expected in the next five years (Remaining Useful Life of 0-4 yrs) is much more certain in timing and cost than an expense projected 25 or so years away. So when does a Reserve project become so vague that it isn’t worth planning for? What are our decision factors in choosing to display a projection of 30 yrs instead of only 20 yrs in our Reserve Study?

First, National Reserve Study Standards (NRSS) requires a minimum display of 20 yrs of income and expenses in a Reserve Study. So any discussion of length of a Reserve Study projection starts with 20 years (not just 10 or 15).

California Civil Code, where our firm has five offices, requires that a Reserve Study include and display all Reserve components with a Remaining Useful Life less than 30 yrs. So we developed our basic format to display an even 30 yrs.

It is important to understand that some of an association’s largest Reserve expenses, like major mechanical components and roofing systems, have life expectancies in the 20-30-yr range. Those components meet the NRSS definition of assets to be funded through Reserves (common area maintenance responsibility, limited Useful Life , predictable Remaining Useful Life, and above a minimum threshold cost of significance). I may not predict accurately if it will fail in 25 years or 21 years (or 30 years), but it will fail, and when it does, it will be a big expense. It is worth preparing for at this time.

It is important to note that since we use Percent Funded as a target for our funding plans, even if an expense is off the horizon of our 30-yr display, the Percent Funded target for that component exists every year, even in the 30th yr. This means that a component with a 40 yr Useful Life and a 35 yr Remaining Useful Life is still being funded with our software, even though no expenditure actually displays in our 30-yr Reserve Study report. Some people mistakenly think, perhaps trying to keep their Reserve contributions low, that if the expenditure doesn’t appear in the x-yr “window of opportunity” considered in the Reserve Study, it will not be funded (it will not require Reserve contributions). That is true if you are funding Reserves on a cash basis, against anticipated expenses, but incorrect when using a Percent Funded target. In that same 40-yr Useful Life component with 35-yrs Remaining Useful Life, in the initial year the Reserve “obligation” (target) is 1/35th of the current replacement cost. Similarly, 30 years from now we can project that the Reserve obligation will be 30/35ths of the projected cost at that time. We know that now, even though the actual expense is (at this time) projected to be five years outside the 30-yr window.

Just thought you would like to know!

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5 Responses to Why Reserve for 30 yrs instead of 20 yrs (or less)?

  1. Thank you very much for explaining this so clearly. I also was under the misconception that something with a 40 year life span would not show on a 20 year study, no matter whether it was a cash or percent funded basis. I suspect people doing their own studies will also assume that they don’t have to include any components that won’t have to be replaced within the period of the study.

    Just to confirm, would you say that all certified Reserve Study Specialists would use the same standard that you use? And if so, why bother showing a period longer than 20-30 years? Because under or over funding might be more apparent using a longer time span? The graph would go askew more obviously?

    • Sharon – great questions. Not all Reserve Study specialists handle things the way we do. National Standards only require a display of 20 yrs of income and expenses. If an RS is working to minimum standards (20 yrs) and if their only objective is cash flow, they could miss an expense in the 21st yr.

      Showing more than 20 yrs is important because it allows readers to see that the Board is planning for the care of their major common area assets.

      We feel that significant expenses require advance planning, and no arbitrary threshold # of years excuses planning for a significant expense. It is de-stabilizing, as you suggest, when a major expense enters the (arbitrary) window of opportunity for Reserve planning. So we look closely at the Percent Funded target when creating our Funding Plan.

      • Dilhi says:

        Thank you very much for explaining this so lelarcy. I also was under the misconception that something with a 40 year life span would not show on a 20 year study, no matter whether it was a cash or percent funded basis. I suspect people doing their own studies will also assume that they don’t have to include any components that won’t have to be replaced within the period of the study.Just to confirm, would you say that all certified Reserve Study Specialists would use the same standard that you use? And if so, why bother showing a period longer than 20-30 years? Because under or over funding might be more apparent using a longer time span? The graph would go askew more obviously?

        • There is no “window of opportunity” for anyone who creates a Funding Plan with a Percent Funded objective, because Percent Funded is not sensitive to a UL or RUL “window of opportunity”. If one creates a Funding Plan with a cash objective (Baseline Funding), a cash expense outside the “window of opportunity” is not considered.

          National Reserve Study Standards require a minimum display of 20 yrs of income and expense detail. As you can imagine, projections past 30 yrs get pretty “gray”. That said, we include significant components with a UL or RUL greater than 30 yrs in our analysis if they are significant, because the extra few years of contributions is worth it. It would be nice for all owners enjoying a 40-yr roof system to pay their 1/40th (approximately) share. I can’t see the fairness in arbitrarily letting the first 10 yrs of users get away without paying their fair share.

  2. Tonisha says:

    Wonderful contribution, I absolutely look ahead to messages from you.