What is not in a normal reserve study?

We frequently get questions from board members on why certain assets not included. What assets are most likely to be excluded?  The general rule is if a component (assets) has a life greater than 30 years its outside the scope of the study.   For example, natural gas piping has a life of 50 years or more and most electrical systems are replaced only if the walls are already open for another purpose. Domestic water and wastewater pipes, vent pipes, water mains from the street, irrigation mains and lateral lines, and sewer mains to the street all fail over time. The problem is that one cannot forecast when these components will fail.

When are these costs likely to occur?  Our  reserve study specialists cannot see through walls or below ground so unless there have been issues, we keep them out unless there is a history of issues  Therefore, if you’re living in a 50-year-old condominium that has not yet replaced these components, it’s prudent to investigate the current condition of your in-wall and subterranean utility lines.

There are two reasons these costs are normally not funded: standards and replacement / repair cost.

 Most reserve study specialists are following the National Reserve Study Standards established by trade organizations which guides us as to what goes into a study.  These standards even recommend that utilities be excluded until “a history of repairs exists,” and do not require disclosure of this omission.  Unfortunately, since these particular components have such a long life, so its important for the association to communicate any known issues when the study is updated

If there is an established history of issues with a component then establishing the replacement costs are pretty easy. However if there is no history but the component is approaching the “end of life” then we will do start funding reserves for that component.

The very large numbers of condominium associations that were constructed in the 1970s and 1980s are now reaching that 40 to 50-year age when these components begin to fail.  I anticipate that we’re going to be seeing many more associations faced with these large costs in coming years.  This is a challenge for the board as many times previous boards were more focused on keeping dues low and not concerned about the future. We call this the head in the sand approach.  Most of these associations will not be prepared for such unanticipated major costs, especially when many are not even well enough funded for their known reserve projects.

For these older association its important to ensure they have healthy funding. This is why we encourage associations to be funded between 60%-80%. This allows an association to fund unexpected repairs or replacement without fully depleting reserve balances.

Accurate planning is the answer to avoiding problems. Always remember, you can’t reserve for what you can’t see…in your report. Your “hidden” components still exist, and the replacement cost, if not properly budgeted, can lead to a political and financial disaster in your community.