By Robert M. Nordlund, PE, RS
Association Reserves, Inc.
Reserve planning is done so owners can avoid getting hit with special assessments when predictable major Reserve expenses occur. By planning ahead, owners pay their “fair share” of the deterioration of major components on an even and stable ongoing basis. But how far ahead is it reasonable to plan? What do you do when you replace your 20-yr old shingles with roofing material “guaranteed” for 40 years, or rebuild your seawall with a concrete structure that is designed to last 50 or 60 years?
In our industry, we are very aware that predictions decrease in accuracy (both timing and cost) the more distant they are. Predictions of events 2 years away are generally more accurate than those 8-10 years away. Similarly, predictions of events 8-10 years away are generally more accurate than those 15-20 years away. But where do you responsibly “draw the line” on how far into the future to plan? CAI’s national Reserve Study Standards dictate a projection of at least 20 years Reserve income and expenses. California State Law requires any project within 30 years be included in Reserve Funding projections. While this outside guidance is helpful, it still doesn’t answer the question of what is “responsible and appropriate”?
Since we are engaged in this type of future planning on a daily basis, we see many associations suffering cash flow consequences after not including large and distant projects in their Reserve budget. Therefore our practice is to include all components for Reserve funding that meet the 4-part national Reserve Study Standards test. We also suggest a two-part test for more distant (30+ year) components. First, the component must be “reasonably predictable” (a manufacturer’s warrantee or some evidence of a pattern of gradual deterioration), and second it must be financially significant (meaning that its absence would be a “material omission” from the Reserve Funding Plan).
Why should the last 20 or 25 years of homeowners enjoying a 40-year roof be the only ones to pay for the roof? Such advance planning becomes especially important when the association finds that the 40-year component is failing faster than anticipated, and after waiting 10 years they find it needs to be replaced in only 10 or 15 years. In this case, critical years of Reserve contributions have been lost, and an unfairly high financial burden falls on the shoulders of current homeowners. Bottom line: for large projects that are reasonably predictable, it is wise and responsible to plan 30 years or more ahead.