Focus Magazine

Certain components might have unpredictable lives, or lives well in excess of 30 years, and accordingly, would not normally be included in a reserve study. However, due to unforeseen circumstances they may eventually become "includable" components. The following are a few examples to illustrate this:

1. Stucco should normally have a typical useful life well in excess of 30 years, and thus it would be considered a lifetime component for purposes of a reserve study. However, defective installation and / or damage due to structural movement may necessitate significant repair, if not complete replacement.
   
2. Defects or problems such as water intrusion, foundation cracks, mold, etc., may occur due to failure or improper installation of other components such as roofing, decking, waterproofing membranes, etc. and ultimately not be discovered until extensive damage has already transpired. Although not cyclical in nature, the costs associated with correction can be substantial.
   
3. Slope failure can occur suddenly and in areas with no previous history of problems. Regular geological inspection and maintenance of landscaping and drainage devices may diminish the potential for slope failure. However, unpredictable circumstances, such as the recent extraordinarily heavy rainfall, may prevail. And, while it may not be necessary to repair remote areas, when structural components are affected, the need for repair could become immediate.

Any of the above mentioned examples can have a dramatic financial impact on an association's budget and must be identified and quantified to the extent possible.

So, how can an association provide for these unpredictable / unique / non-recurring (hopefully) expenditures in their reserve study? In the case of defects / problems, the first step would be to obtain expert evaluation, which may entail the development of specifications for repair, replacement or remediation. Estimates should then be obtained for corrective measures and line items can be inserted in the reserve study accordingly. It is important to at least establish the component in the study and include the most "educated" costs determined at that time, disclosing that it is based on current estimates and may be subject to change. The amounts can always be adjusted in a future reserve study update as greater insight is gained regarding the extent of the issue. With respect to an item such as slope failure, it would be prudent to establish a contingency line item for the potential of such occurrence. One method might entail deriving an amount based on total acreage, contributing towards this "fund within a fund" until it reaches a certain level, and thereafter keeping it constant. In the event of a slope failure, the "contingency" could then be drawn down to the extent necessary and replenished over a certain time frame accordingly.

It is, therefore, even more critical that reserves be well-funded in light of the potential of such unexpected unique or nonrecurring expenditures. The California Civil Code only requires an association to disclose its percent funded. It does not specify an amount or percentage that an association needs to be funded. However, to be less than well-funded may undoubtedly necessitate the imposition of special assessments or even require obtaining a loan, which will involve various restrictions and compliance issues. What then is well-funded? The general consensus among reserve providers is that anything below 100% would not be adequate. Practically speaking though, it would be prudent to increase contributions to the reserve fund as necessary with the goal of ultimately achieving 100% funding, and then maintain regular funding to stay at or near that level thereafter.

To recap, the essential things to remember when trying to manage unpredictable or one-time reserve expenditures are:

1. Quantify the problem / component as soon as possible, employing experts as necessary, and determine the most accurate cost estimate / time frame with the information currently available.
   
2. Establish a line item(s) in the reserve study reflecting these amounts.
   
3. Adjust the line item(s) in the reserve study accordingly, as additional information is made available.

Les Weinberg, RS, MBA is a principal of Reserve Studies Incorporated.