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

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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!