Hawaii's Leading Provider of Reserve Studies
 Accurate Reports Lead To Informed, Wise Decisions
 
 

What is a Reserve Component?

By Mike Price CMCA, AMS, RS


The simple answer is a Reserve Component is a major physical asset the association has the responsibility to maintain. The component ultimately will need to be repaired or replaced in the future. We see roofs, asphalt, building paint, insurance deductibles, annual pool party fund, engineering study costs, plumbing drain repairs, and other expenses listed as Reserve components. Some of these items are definitely not a Reserve Component and listing in the Reserve Component List is not in the best interest of the association and ultimately the owners.

We also notice major components omitted from the Reserve Component List like wood siding, and asphalt parking lots. Again this is not in the best interest of the association and future owners.

A Reserve Study prepared according to National Reserve Study Standards (NRSS) defines the Reserve Component List: a clear description of the major assets maintained by the association with limited, predictable life expectancies. There is a 4 Part Test qualifying an expense as a Reserve Component:

  1. Component must be the Association's maintenance responsibility.
  2. Component must have a limited Useful Life (UL).
  3. Component must have a predictable Remaining Useful Life (RUL).
  4. Component must be above a minimum Threshold cost.


All parts of the test must be met for an expense to qualify as a NRSS Reserve Component.

How is maintenance responsibility determined? The association Declaration documents clearly defines what "Common Elements" that the association must maintain. There are clear boundaries for owner apartment responsibilities that are not an association responsibility. The Description of "Limited Common Elements", items for the exclusive use of certain owners only, like parking stalls and lanais maybe an association responsibility or defined as an item the association repairs, but the cost is back-charged to the respective owner. In the case of cost being the owner's responsibility the component is not a reserve component. The association Bylaws clarify "gray areas". The records of approved Board of Directors Resolutions also clarify maintenance responsibility.

What about limited Useful Life? A concrete building properly maintained and protected can have an indefinite long life. The paint that provides a water proof protective envelope needs periodic replacement. Minor repairs may be needed, but the building could stand for 30, 40 and more years. Europe and other parts of the world have buildings 300 - 500 years old. On the other hand asphalt that is not kept sealed, dries out and crumbles. If tree roots intrude under the surface, or ground settles the surface cracks and buckles. Replacement is needed eventually in 10 to 30 years depending on care and use.

What is predictable Remaining Useful Life? As soon as you place a component into service it starts to age and deteriorate. Historic records establish a predictable life before replacement is necessary. Exterior building paint has a normal life defined by the substance it covers, weather exposure, and quality of paint and workmanship. Replacement or major rebuild can be reasonably predicted. Elevators have a known predictable life before performance and safety is compromised.

How is Threshold cost established? Ultimately the Reserve budget plan should not be cluttered by irregular insignificant small expenses like light bulbs and other consumables. A $300 BBQ can be significant to a small 8 apartment condominium, but not for a 250 apartment 25 story condominium with elevators and lots of expensive mechanical systems. Sometimes the Threshold cost is the amount of money the management company or the onsite manager is authorized to spend, except in an emergency event, without a specific approval vote of the Board of Directors.

Let's go back to the list of components in the first paragraph and evaluate them with the NRSS 4 Part Test

Component 1.AOAO Responsibility 2. Limited UL 3. Predictable RUL 4. Above $1,000 Threshold

Roof

Yes

Yes

Yes

Yes

Asphalt

Yes

Yes

Yes

Yes

Paint

Yes

Yes

Yes

Yes

Ins. Deductible

Yes

No - claims irregular & not an asset

No - event unpredictable

Yes

Party Fund

Not in declaration, best handled as an Operating expense

Not an asset, but an event

No - Depends on quantity of good food and mood of attendees

No - $800

Engineer study

No - advise only

No - one time report

No - one time report

Yes

Plumbing repair

Yes

No building wide life

No - varies building to building

Yes - $2,500

Tree Trim

Yes

Yes - annual or biannual schedule

Yes - annual or biannual schedule

Yes - $5,000


The roof, asphalt and paint past the test. Insurance deductibles are unpredictable events and are best carried in the Operating budget as an annual recurring event. A party fund is a convenient good communication tool, but not an asset and it is best to fund this under the annual Operating budget. An engineering study may design and schedule a replacement cost, but is not necessarily a future cost. It is a decision making tool of a Board of Directors utilizing "good business" due diligence. Plumbing repairs are appropriate if historic trend is documented or a professional engineer report recommends a major repair/replacement design with accompanying estimated cost. Tree trimming qualifies at one property, but may be accomplished at another as an in house staff task covered under the Operating maintenance budget instead.

Most component expenses are separated between the Reserve funding plan and the Operating budget by the 4 Part test. The Board of Directors has the responsibility to clarify the ones that fall into the "gray area". The Reserve component selection process is critical. The resulting Component List is the foundation of the Reserve Study Report Plan. The association Funding Strength, recommended reserve contribution and projected future funding pan are based on this list. A cluttered component list may increase funding requirements and obscure major expenses that require focus. At the same time appropriate reserve components missing from the list will unfairly surprise future owners with hidden unplanned special assessments.

About the Author: Mike Price - CAI Reserve Specialist #164 and former President of Association Reserves Hawaii LLC, provides independent third party comprehensive reserve studies for all Islands. Mr. Price has a bachelor degree from Eastern Washington University and over 30 years experience in construction and project management. He holds the CMCA and AMS designations as a past condominium Site Manager and General Manager. Mr. Price can be contacted at mprice@akamaireserves.com or (808) 936-4789.