The reserve study consists of a number of estimates and assumptions. All of them are important, but one stands out as having significant impact upon the calculation of needed reserves – remaining life of components. As an example, if your previous reserve study indicated that the remaining life of the roof was 15 years and it is now determined to be only 10 years, then you have much less time to accumulate the needed funds, which translates into higher assessments. That is considered a change in estimated remaining life.
So how is remaining life calculated? First of all, recognize that it is an estimate. Unless the major repair or replacement is imminent and the date is known, the remaining life is an estimate. The actual remaining life may be shorter or longer than what is estimated in the reserve study. In more than 20 years of reserve study experience, we have seen components that have lasted only a small percentage of their original estimated life, and others that have lasted multiples of their original estimated life. One of the purposes of the reserve study is to attempt to predict the remaining life as closely as possible.
When a component is placed into service, the first estimate of remaining life is likely to be based upon a warranty, manufacturers’ representations, contractor estimates, cost estimating database, or common industry practice. You may, in fact, have different estimated lives from each of these sources. It means you’ve got to make a decision as to which estimated life you choose to use for your reserve study. This life is known as the useful life and the period of time is known as the normal life cycle or replacement cycle, as virtually all components are anticipated to deteriorate over a period of time known as their normal life cycle.
As time progresses, the condition of the component will change, and perhaps not in accordance with the original estimated life. This, again, is normal, as components rarely deteriorate exactly in accordance with the estimated normal life cycle. That means the estimated remaining life may be adjusted in each reserve study after the component is placed into service. That’s not likely, but it can occur. One of the primary reasons for performing the component condition assessment as part of a reserve study site visit is to determine the estimated remaining life of each component. Again, this may be accomplished in several different ways.
- We, as reserve preparers, ask you (or your maintenance staff, support vendors, or contractors) what your future plans are for major repair or replacement of each significant component. As an example, it does little good for me to assume that a roof with an estimated original life of 40 years that is now 15 years old (and therefore should have a remaining life of 25 years) is going to reach its full lifecycle when you already know that you have significant issues due to either product failure or improper installation, and that you are estimating you need to replace the roof within the next 10 years.
- We ask you about your current maintenance activities and any factors (such as excessive use or extreme wear and tear) that exist that may impact the remaining life of each significant component.
- Based on our own observations and experience, and with knowledge of when the component was placed into service, we evaluate the condition and form our own estimate as to the remaining life of each significant component.
- We inquire about warranties and product quality (which is not always evident from visual observation).
Clearly, judgment comes into play in making the remaining life decision based on any of the methods above.
Since the reserve funding requirement is a function of the aggregate remaining lives of all components combined, the more accurate the remaining life estimate, the more accurate the funding plan will be. For those associations that use a baseline funding goal, any significant reductions in estimated remaining lives can plunge you into special assessment territory. That is one of the reasons why our reserve study company continually recommends against using a baseline funding plan. It simply leaves you no room for significant changes in remaining life or replacement cost.
A caution here – many times we have gone on site for the first site visit of an Association that is a new client for our Company and, as we have our initial discussion with Association management and maintenance staff, are told that they intend to repave the streets (or pick any other reserve activity) simply because the prior reserve study says now is the time to do it. That’s putting the cart before the horse. The reserve study should be based on your maintenance plan, and your maintenance plan should be based upon operating maintenance activities and the physical condition of the components. While the reserve study may be the financial representation of a maintenance plan, it is not itself a maintenance plan. Don’t confuse the two.