by Michael Nash
The Component List
The Reserve Component List forms the basis of every Reserve Study, specifying the scope and schedule of all projected Reserve projects. Reserve Fund Strength and the Reserve Funding Plan are both calculated based on the repair and replacement projects that appear on the Reserve Component List. Therefore, it is very important that the Component List is complete, accurate, and constant. Fortunately, what qualifies as a Reserve Component line item is not an arbitrary decision. The rules laid out by the National Reserve Study Standards ensure a uniformity to component lists, no matter who is performing your Reserve Study.
National Reserve Study Standards
Potential components are put to a four-part test as defined by the National Reserve Study Standards. To qualify for reserve budget funding, a component needs to pass all four tests below:
- The component must be a common area maintenance responsibility.
- The component must have a limited Useful Life. This is referred to as the UL in most reports.
- The component must have a predictable Remaining Useful Life. This is referred to as the RUL in reports.
- The scope of work must be above a minimum threshold cost.
Breakdown of Tests
Let’s break down the above tests:
- Reserve line items should be established based on the Association’s common area assets and maintenance responsibilities. These are typically defined in the association’s governing documents, but can also be established in looking at the Association’s past actions and precedents. For example, a question regarding the maintenance responsibility of a wood fence that borders a common area and a homeowner’s backyard can typically be answered by looking at the CCRs. If it is not spelled out, then that Association will most likely have established a precedent in handling that component.
- Components are excluded with extremely long lives or components that can function indefinitely with only minor ongoing maintenance or repair. For example, when looking at a clubhouse at an association, we do not include the actual building structure to be replaced. It should last the life of the property.
- This test rules out any unpredictable or random line items. A future expenditure needs to be reasonably anticipated to be defined and incorporated into a plan.
- This test rejects components that are below a minimum threshold cost. The last thing you want is to clutter the Reserve budget with insignificant expenses that are better handled through the ongoing operating budget. This threshold is established by the Manager and/or Board member and is typically in the range of .5% to 1% of the Association’s annual budget.
The threshold amount will vary by Association. This is not a one-size-fits-all determination. For example, a $500 replacement project may appear in the Reserve Study for a small 4-unit Association, but certainly, wouldn’t qualify as a Reserve budget line item for a large 350-unit Association
In conclusion, when reviewing your Reserve Component List keep the four-part test in mind. This will ensure that the list is complete, accurate, and consistent with little likelihood of an overlooked component needing to be added in future years. Remember, an accurate Component List is absolutely essential to a strong and accurate Funding Plan. You can’t have one without the other!