Our reserve study company, Facilities Advisors, Inc., was recently hired to perform reserve study for a 27 year old association that has never retained an outside reserve professional to perform a reserve study. All reserve studies for this association, and there were several of them, were performed by either the property manager or a volunteer committee of members. These prior reserve studies all shared one common factor; the financial projection period was for 10 years only. The Association’s position was that “no one can predict anything beyond five to ten years with any degree of accuracy, so why bother to try and predict it at all?”
A group of concerned members finally prevailed upon the board to hire an outside professional (which ended up being our firm) because they were (1) concerned that not all common area components appeared to be considered in the study, and (2) uncomfortable with the ten-year funding plan, as they knew other associations used a 30-year funding plan.
To address these concerns, our first step was to add in the couple of obvious component omissions. The second step was to use our proprietary software which utilizes a 30-year projection period. Based upon a continuation of the funding plan presently in place, we determined the association would run out of reserve monies by year 17, unless it either borrowed money or approved a large special assessment.
This is the danger of looking at too short of a funding projection period. While a plan may work for the short-term, it doesn’t necessarily work for long-term. When you look at a longer term period you will often find that because expenditures vary so significantly from one year to the next that you can get a skewed picture of the health of your reserve fund by looking at just the shorter time period. Another way to have looked at this would be to analyze the percent funded on a year by year basis. What this association would have seen was that, while there was sufficient funds were available for the first 10 years of the plan (meaning the balance in reserves did not drop below zero), the percent funded decreased steadily and significantly, which was an advance indicator of problems to come.
While we agree that no one can predict exactly what’s going to happen 30 years from now, it is equally correct to state that no one can predict exactly what is going to happen 10 years from now. The fact is that a reserve study is a projection based upon a series of assumptions and virtually none of those assumptions will be exactly correct. However, the purpose of a reserve study is to create a plan to have approximately the right amount of money available at approximately the right time. You cannot do this with any reasonable degree of accuracy when you’re looking at only a 10 year period, given the long life of so many of the components that the association is required to maintain, repair, and replace.
Gary Porter is the president of Facilities Advisors, Inc., a company that provides reserve study services for associations nationwide. Mr. Porter has 28 years of reserve study experience and has performed hundreds of reserve studies. Mr. Porter served as national president of CAI in 1998 – 1999.
Facilities Advisors, Inc. is a member of Community Associations Institute (CAI), American Resort Development Associations (ARDA), the California Association of Community Managers (CACM), and the Association of Professional Reserve Analysts (APRA).
