Reserves

WHAT AREN'T RESERVE EXPENSES?

1. Capital improvements are NOT reserve expenses.

2. Annually recurring expenses are NOT reserve expenses.  Expenses incurred every year belong in your operating budget.

WHAT ARE RESERVE EXPENSES?

1. Expenses for inspection, maintenance, repair or replacement of one or more components that already exist AND are substantially the same.  

2. Expenses that do not occur annually, but are expected to occur at least once or more within the expected useful life of the property as a whole. 

N.B. The expense does not have to be "predictable." For example, generators and common piping (plumbing) are often omitted from reserve studies.  The fact that there is a lack of consensus about when or if these items will reliably require inspection, maintenance, repair and/or replacement does not obviate them from being included in a reserve study.  Failure to include common piping has resulted in many multi-million dollar special assessments.

N.B.  The expense does not have to be "significant" or more than 1% of your annual operating budget.  "Significant" and "material" and other such words become discretionary judgements unless they are clearly defined by statute or your governing documents.  Quarrels have been had over less.  

20 items that are 0.5% of your operating budget add up to 10%.  10x $3,000 items = $30,000.  Oh, and is that 1% in current dollar terms or inflated 20 years from now?  Oh and what if your estimate of the replacement cost is off by 1,000%?

How are you tracking the need to maintain, repair and replace something every 5 to 10 years if the component isn't listed in your reserve study?  And how are future owners expected to budget for it?

For all the reasons above and more, put every less than annual expense to maintain, repair and replace components in your reserve study.  This is the ONLY way to ensure: 1) continuity for reasonable, reliable, tracking and 2) equity of reserving for expenses over time.

3. The expense is some form of common expense.

Common expenses are defined by statute and your declaration / CC&Rs and generally benefit more than one unit.

🏦💵 How can your association INVEST reserve funds? 🛟🦺

With the exception of 10-year Treasury Notes, principal-guaranteed securities such as money market funds, certificates of deposit (CDs) and US Treasuries (bills, notes and bonds) have NEGATIVE INFLATION-ADJUSTED RETURNS from the year 2000 to 2024.

Unlike retirement planning which is finite (humans have an expiration date), community association reserve funding needs are infinite ♾️!

Contrary to the common wisdom of most long-term investment planning (university endowments, pension plans, whole life insurance assets, etc.), community associations have been lead to believe that risk-adversity is key to storing their collective billions of reserve dollars in an eroding investment scheme as a best practice.  Guaranteeing return of principal (moving to more conservative investments) a well-known concept employed by target-date funds, but as we've already stated, community association common assets are typically planned for inspection, maintenance, repair and replacement in perpetuity.

💡 Most associations with more than minimal common assets would benefit from rethinking their reserve investment plan to PRESERVE AND GROW capital on an inflation-adjusted basis INSTEAD of an absolute, fixed dollars-in, dollars-out concept.  Prudent investors understand that purchasing power decreases over time.

READ: HOW CAN YOUR ASSOCIATION INVEST ITS RESERVE FUNDS?