Reserve Studies – It’s Not About Preparing for the Future

The standard comment we get from clients, prospects, and other industry professionals is that Reserve Studies and Reserve Funding are about “preparing for the future.” Well, that’s simply not the case.

Understanding Future Expenses

Most of us have a mortgage. Some of those mortgages have a “balloon” payment at a future point in time. That is a contractual future expense. Some of us with small kids in the house are anxious about college bills. That is a future expense. But physical deterioration goes on every day. One day, a roof is new; the next day, it’s no longer “new.” It’s a little old. After being installed new, it is a gradual, daily, observable progression towards the day it will fail. You may not write the check for that deterioration until a future point in time, but the deterioration is accumulating on a daily basis nonetheless.

The Concept of Deterioration Cost

This is a theme you’re going to hear more and more from the community association industry. The subject is making wise (not foolish) decisions about the association’s “deterioration cost.” That cost of deterioration is as real as the electricity bill or the landscaper’s bill. If you don’t pay it, the bill doesn’t go away. It just gets added to the next month’s bill. And if you don’t pay that bill on time, you get a late fee. That’s the same with Reserve projects. If you don’t perform a Reserve project in a timely manner, it often gets more expensive (due to the deferred maintenance that now needs to be rectified).

Determining Your Association’s "Ongoing Cost of Deterioration"

So what’s your association’s “ongoing cost of deterioration”? You learn that in your Reserve Study. It is based on your association’s size and the types of common area amenities you’re responsible for maintaining. Every day, all those assets are getting older, marching gradually towards needing to get replaced (or refurbished or repainted or …). If you are funding less than your rate of deterioration, current homeowners are unfairly paying less than their fair share, and some poor sap in the future will be faced with paying the unpaid portion of that bill. Your association’s “ongoing cost of deterioration” will float upwards over the years due to inflation, but it should remain relatively constant through the years. It’s just plain part of the cost of home ownership in your association. Associations that have historically underfunded their Reserves will likely need to collect more than their “ongoing rate of deterioration” to play catch-up and prepare for a large roofing (or painting or asphalt or elevator…) expense. Associations with surplus Reserves should contribute less than their “deterioration cost” to gradually bleed off their surplus. But if an association is regularly funding Reserves less than their “ongoing cost of deterioration,” they are headed to special assessment land.

Final Thoughts

It’s not about Reserving for the future. It’s about keeping up with bills due to ongoing deterioration.

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