Criteria for the inclusion of an item into the reserve budgeting process
There are several general criteria for the inclusion of an item into the reserve budgeting process: First is a specific expenditure amount that would qualify the item as a reserve component. Many common interest developments choose a replacement cost of $500 or $1,000 to qualify an item as a reserve component. A certain percentage of the total budget could also be used as a determining guideline. Secondly, is the frequency of replacement. If a component is replaced annually or more often, then the expense item should be included in the operating budget; not the reserve budget. The last general criterion would be the community's ability to maintain accurate replacement records. It would be difficult, for example, to keep track of all the irrigation valves unless each valve was assigned a control number, a detailed location map was available and an accurate written log with specific replacement dates and related costs was maintained on a monthly basis.
In conjunction with the general criteria, each Community should review on a case-by-case basis the complete inventory of all common areas and amenities for which they are responsible. Also, if at least one reserve study has been performed, a review of the reserve components included in the study should be made by new and future Boards of Directors. This will incorporate new thinking, opinion and direction of the Board reflecting changing values and attitudes of the community.
Occasionally, a component should be included, but only as a one-time replacement. Salvage value should be considered for major capital assets. Planned future capital improvements should be considered as a prospective reserve component. This would allow future funding or a "savings plan" over a period of years for improvements that otherwise would be a burden to the membership.
Other considerations should be made for communities with special problems or requirements. Such prospective reserve components as Landscape Replacement, Construction Defect Repairs, Fire/Safety Systems and a Legal Expense Reserve are cases that may be one-time expenses or on-going expenses the community wants to plan for the reserve budget until the entire expenditure has been made.
Budgeting is normally excluded for repairs and replacements of assets which are deemed to have an estimated useful life equal to or exceeding the useful life of the physical facility or the community itself. Expenses which are caused by acts of God, accidents or other occurrences which are more properly insured for should also be excluded.
Unfortunately, due to the prior lack of
required periodic review of reserves, many Boards of Directors
find themselves facing an unavoidable SPECIAL ASSESSMENT. Large
or burden-some expenses that are forced to be met by such special
assessments should not be included in the reserve budget. Once
installation is complete, then specific future repairs and replacements
can be properly budgeted into the community's overall financial
plan.
Notes: California law requires all associations to perform
reserve studies. However, many questions are left un-answered
such as what to reserve for and how much? Board members and managers
often have questions in this developing area of community association
practice.