Yet Another Budgeting Challenge – Buildings Do Not Age Gracefully

Many Boards make the incorrect assumption that past project expenses are a good indicator of current reserve account adequacy (i.e. they are well prepared for future reserve expenses). Looking to the past can be helpful for some aspects of budgeting; how long did the roof last replacement cycle or how often are we having to remove a dangerous tree on site, but creating a component list or trying to determine appropriate reserve account allocation rates based on historical data is a mistake in reserve budgeting.

 

Buildings Age Just Like People Do

 

As buildings age there will be more and more issues, advanced deterioration and projects that will come due.  Just as a person in their sixties would not expect to have the same health issues as they did (if any) when they were in their teens; a Board budgeting for reserve expenses should not expect their building to have the same issues that arose when it was new.

 

Let’s take a look at a timeline of some of the larger and more common projects expenses we see in a typical condominium building. I’ve made a list based on the number of years since construction. These are some of the larger component costs which will have a significant impact on a reserve account if they are not adequately budgeted for years in advance. I have highlighted in red the components which are typically the most expensive and difficult for a community to prepare for.

Do you see an issue with looking to the past to create a component list and to determine if the reserve account is at an adequate level?

 

That’s right, no matter where you’re at on the timeline, if you look to the past you’re missing the vast majority of expenses that will be occurring in the future. What was sufficient for the first 15 years is grossly inadequate for the 15-30 year period and only gets worse as time moves forward.  To make matters worse, as a community gets into the 30-45 & 45-60 year ranges not only does the component list get significantly longer, the costs for the systems that will need replacement is much higher (most expensive in red); water lines, waste lines, electrical systems, HVAC systems, water heating systems., etc. are all very costly and need to be funded for many years or decades in advance of their actual expense.

 

Buildings Do Not Age Gracefully

 

Components which were once repaired refurbished may require much more expense full scale replacement projects instead the second time around on the timeline. Examples include:

 

  •  - An asphalt overlay (resurfacing) at 25 years versus an  asphalt replacement project at 50 years
  •  - A decking system that needs to be replaced at 50 years even though it was only refurbished at 25 years
  •  - A low slope roof which needs a new membrane and be regraded at 50 years instead of just a new membrane at 25 years.

 

Buildings, for the most part, do not age gracefully; they get more expensive as they age. Essentially more and more of the building will need to be replaced over time.

 

This above is a common scenario we run into; Boards have based their reserve allocation rate on past project expenses and are often shocked to find that there reserve account is at a poor funding level, something we call Percent Funded; a measurement of how much is in the reserve account versus how much is actually in the reserve account. If they are unaware or ignore future projects then they will be making extremely poor budgeting decisions now; ones that will result in a grossly underfunded reserve account and which will place the community in a position of relying on unfair special assessments, loans or deferred maintenance (lower marketability).

 

So What Is An Association to Do?

 

The easiest solution to this budgeting challenge is to have a reserve study completed. If a reserve study is being completed in-house via a do it yourself reserve study software make absolutely sure the person completing it knows a lot about buildings systems, construction costs and construction techniques. Since the whole reserve study is based on the component list this is by far the most important part of the reserve study. A very common mistake is to assign the task to someone with finance or accounting background but with no knowledge of construction costs, building systems, useful lives, etc. Typically this results in a great looking report which is not at all accurate or helpful for the budgeting. The math for reserve studies is simple it’s the component list and the numbers related to them, construction costs and useful life, which have the largest impact on the results in a reserve study. From our years of looking at thousands of communities we have yet to see a comprehensive in-house created component list. The time needed, knowledge obtained, expertise refined, drive to learn and tools needed are just too great for the typically person to try and figure out in their free time.

 

In our opinion the more appropriate and responsible decision would be to have a reserve study completed by a reserve study professionals, someone who is designated and has been working in the field for years. A professional reserve analyst will have seen many communities just like yours; what is new and challenging for a Board member to learn is just another day at the office for a reserve analyst. Additionally the reserve analyst will be independent (no pressure to remove or overlook costs) and be able to provide information and suggestions based on their past experiences.