Can Your Reserve Plan Take a Hit?
What an aging car can teach a board about Reserve Plan Resilience
By Erik Sundquist, RS, Managing Partner, SMA Reserves
Every association I work with is, at bottom, one very large shared house. It has roofs, paint, paving, pipes, decks, and sometimes an elevator or a pool. On any given day, almost none of it is failing. All of it is being used up.
A reserve study asks four plain questions about that house. What is wearing out? Roughly when will it need work? What will it cost? And how much should today's owners set aside so the people who own the property later are not handed the whole bill? That last question is about fairness.
For years, boards have answered it with percent funded. It is a good, honest number. But it is a snapshot. It shows where reserves stand on one day. It does not show where the plan is going, when the hardest years arrive, or whether the plan could handle a surprise.
I watched that play out with a Bay Area community we work with. Last year it started the fiscal year 79 percent funded, with about $282,000 of work and a contribution increase planned. The board decided to put off both for a year. This year the study opened higher, at 83 percent. Most boards would call that progress. But the plan behind it got weaker. Last year's plan had 17 strong years out of the next 20. This year's has one. A special assessment now shows up in 2047.
That is what a snapshot misses. When a project is pushed back, it does not go away. It moves closer to the other projects that were pushed back too. Costs climb. Damage you cannot see keeps growing. Then several large projects land in the same few years, often right when reserves are lowest. I call that component compression.
This is why I have started talking about Reserve Plan Resilience. The idea is simple. A resilient reserve plan can take a hit and still leave the board with choices. Repair or replace. Act now or wait on good evidence. Do one project or combine two. As the cushion shrinks, those choices disappear one at a time, until the only one left is a special assessment.
It also helps to be honest about what a reserve plan is. It is a model, not a promise. It rests on estimates of cost, life, inflation and timing. And a board only approves one year at a time. Years two through thirty are not commitments. They are assumptions about what future boards will choose. That uncertainty is not a reason to distrust the plan. It is the reason to test it.
Here is a test any board can ask for. Take the large projects coming in the next several years and raise their cost by 20 percent. Move the single largest one two years earlier. Then add one surprise, like plumbing that fails inside the walls or an insurer that wants new electrical panels before it will renew. If the plan still works, it is resilient. If it does not, it is thin, and it is far better to learn that on paper than from a failure.
None of this means every deferral is wrong. Some of the best run communities I know extend the life of components all the time. The difference is proof: an inspection, a condition report, a real bid. Deferral backed by evidence is stewardship. Deferral backed by hope is borrowing against your own buildings.
If your board wants a place to start, pick three things. Get professional eyes on the few large projects that drive the next five to ten years. Learn where your plan dips lowest, and watch for projects that keep sliding. And start a building memory file, one place for every inspection, bid and repair, so what your association knows does not leave when a director does.
My parents spent their summers restoring an old cabin in Finland that they knew would outlive them. They were taking their turn. A board is doing the same thing. The building was here before us and will be here after us. For a time, it is simply ours to care for.
Want to go deeper? Our white paper, Reserve Plan Resilience, and a two page guide for boards are available from SMA Reserves.
Request a copy or a proposal at smareserves.com.
