Coping with Surprises

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All Association-governed communities 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 goal 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 the 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 Useful Life (UL) and a Replacement cost ($) above a minimum threshold amount. Common Area assets need to be 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 their cost and timing. In addition, “premature failure” 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 would be doing a disservice to our clients, to engage in the “guessing game” of including significant components in the Reserve Study when the scope or timing of those expenses in “unknowable”. To include such assets serves only to drive up reserve contributions and reserve balances, drive down the Reserves “Percent Funded” rating, and diminish the reliability of both of these computations.

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 a particularly dubious asset, we will be quick to include that component in the Reserve Study. But 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”. Our job is to help our clients responsibly plan for the expenses that can be anticipated, leaving them only exposed to special assessments when there are “true surprises”.