By Bryan Farley, RS, Association Reserves, Colorado
As the population in Colorado continues to grow a steady rate, one may notice the many new housing developments, high rises, and condo complexes popping up around the state. These properties look great, with fresh paint on the walls, roofs that do not leak, and elevators that work when called. However, within a few years these buildings will start to experience the same issues that plague every other building in the area, asset failure.
This dilemma is not only limited to new projects, but also to older buildings that have just undergone a renovation or remodel. In fact, all new construction will experience a state of deterioration once the project has been completed.
How can owners be motivated to raise Reserve Contributions after the board just special assessed the owners to fund the remodel? How can a board of a brand new condo building justify raising Reserves when the majority of the owners closed on their units six months ago?
The answer of course is that as soon as the new construction has been finalized, the assets will begin to decay and deteriorate at a predictable rate until all of the assets have failed completely. However, the assets will not all fail at the same time. For example, the roof may last twenty-five years, but the carpet may only last eight years. If the failure and replacement of the assets do not occur at the same time, how will the costs of these assets be evenly distributed throughout the life of the building?
It is only fair that each owner pay for the predictable deterioration of the assets that are gradually deteriorating each month/quarter/year. That is fundamentally what a Reserve Study attempts to help owners accomplish, take all those irregular Reserve expenses and distill them down to a steady deterioration rate that the association can then offset be collecting contributions from all the current owners in order to keep pace with the ongoing deterioration of the common area.
That is why the Reserve contribution rate recommended in a Reserve Study is not for a future expense that is some other unlucky person’s problem. The recommended Reserve contribution is designed so each homeowner pays a fair share of ongoing Reserve component deterioration during the months and years that they own in the association. It’s only fair. In fact, it is unfair for any current owner to pay less than ongoing deterioration, forcing some unlucky future owners to over pay due to past under-reserving.
Moving forward, how much should current owners contribute to Reserves? In our experience, “adequate” Reserve contributions typically make up anywhere from 15% to 40% of an association’s total budget. The cost of Reserve component deterioration can be expensive, so there are ways to minimize your Reserve contributions:
- Make sure your Reserve contributions are calculated using the “cash flow” computation method (resulting in fairer, smoother, and lower contributions)
- Maximize the interest the association is receiving on the Reserve account (if possible)
- Perform timely maintenance in order to extend the life of your reserve components
Reserve components are expensive and are deteriorating every day. A Reserve Study will provide guidance on how much money will be needed each year to pay for the ongoing asset failure. Each year, owners should hire a professional to review and update their Reserve Study.
By commissioning a Reserve Study, a board takes the first step toward a calmer and proactive future. Prudent planning for inevitable repair and replacement costs will benefit future owners, but present owners benefit also. With a Reserve Study boards and managers can help the present generation of owners understand that they, too, can enjoy their share of the benefits of prudent reserve planning.