Reserve studies are based on the assumption that components will reach their maximum useful life. However, if your preventative maintenance plan is not aligned with your reserve study, it is highly unlikely they will ever reach their maximum useful life. Many Minnesota homeowner associations try to reduce expenses by not performing needed work. Preventative maintenance may seem like an easy place to cut back when everything appears to be running well, but neglecting it can cost your association much more in the long run, as the following example demonstrates.
Let’s say that you have a piece of equipment that is expected to last another 10 years. Its replacement cost is estimated to be $20,000. You allocate $2,000 to your reserve fund for the next 10 years to cover the cost. (This comes out of the association’s annual assessment income.) Unfortunately, the board neglected to follow the recommended maintenance schedule, so the equipment actually only lasted seven years. Here’s how this impacts your community.
- Your association has “lost” three years of useful life from this expensive piece of equipment
- Your association now needs to spend $20,000 three years sooner than expected
- There isn’t enough money set aside in your reserve fund because the association has only accumulated seven years of funds ($14,000) and are forced to quickly find another source of funding for the additional $6,000
Community association boards must also take a predictive maintenance approach to preserve their community’s components. This requires regular inspections and monitoring of your equipment and common facilities. Predictive maintenance helps you see what is operating at optimum capacity, what appears to be on a path of requiring attention and what needs immediate action. Predictive maintenance positions your association for financial stability and greater predictability. Last, but not least, it forces boards to look into the future so that a proactive approach to the items deemed necessary can be implemented.
Ignoring or minimizing the importance of adequately funding and planning your reserves is a huge disservice to the members of your association. It’s true that it isn’t easy to understand the complexities of reserve funds and the reserve studies that determine them. Still, it’s crucial that boards give their reserves thoughtful and ongoing attention – regardless if they are mandated.
With decades of experience and our database of local inspectors and experts, FirstService Residential can help your homeowner association engineer a proactive program that maximizes savings and minimizes surprises. Working with knowledgeable professionals who can help you follow the reserve study’s guidance will also ensure that your reserve fund is there when you need it. An experienced community management company can guide you in many areas: finding a reserve study specialist, following recommended maintenance schedules and educating your board and residents about effective budgeting.
Want to learn more about how to keep your community association financially strong and stable? Fill out the form below to download the white paper, “Budgets, Reserve Funds and Financial Planning 101: Building a Powerful Financial Future for Your Managed Community.”