The study of reserves consists of a series of estimates and assumptions. All of them are important, but one stands out as having a significant impact on the calculation of the necessary reserves: the remaining life of the components. For example, if your previous reserve study indicated that the remaining useful life of the roof was 15 years and now it is determined to be only 10 years, then you have much less time to accumulate the necessary funds, which translates into evaluations more tall. That is considered a change in estimated remaining life.

So how is remaining life calculated? First of all, recognize that this is an estimate. Unless major repair or replacement is imminent and the date is known, remaining life is an estimate. The actual remaining life may be shorter or longer than that estimated in the reserves study. In more than 20 years of experience in reserve studies, we have seen components that have lasted only a small percentage of their original estimated life and others that have lasted multiples of their original estimated life. One of the purposes of the reserves study is to try to predict the remaining life as accurately as possible.

When a component is placed in service, the first estimate of remaining useful life is likely to be based on a warranty, manufacturers’ representations, contractor estimates, cost estimating database, or common industry practices. In fact, you may have different estimated lives from each of these sources. It means that you have to make a decision about which estimated life you choose to use for your reserves study. This life is known as the useful life and the period of time is known as the normal life cycle or replacement cycle, since virtually all components are expected to deteriorate during a period of time known as their normal life cycle.

As time passes, the condition of the component will change, and perhaps not according to the original estimated life. This, again, is normal, as components seldom deteriorate exactly according to their estimated normal life cycle. That means the estimated remaining life can be adjusted in each reserve study after the component is put into service. That’s not likely, but it can happen. One of the primary reasons for performing component condition assessment as part of a reserve study site visit is to determine the estimated remaining life of each component. Again, this can be achieved in a number of different ways.

1. We, as stock preparers, ask you (or your maintenance staff, support providers, or contractors) what your future plans are for major repair or replacement of each major component. As an example, it does no good for me to assume that a roof with an original estimated life of 40 years that is now 15 years old (and therefore should have a remaining life of 25 years) will reach its full life cycle when you already know that has major problems due to product failure or improper installation, and estimates that the roof needs to be replaced within the next 10 years.
2. We ask about your current maintenance activities and any factors (such as excessive use or extreme wear) that may affect the remaining useful life of each major component.
3. Based on our own observations and experience, and with knowledge of when the component was placed in service, we assess the condition and form our own estimate of the remaining useful life of each major component.
4. We ask about warranties and product quality (which is not always apparent from visual observation).

Clearly, judgment comes into play when making the remaining health decision based on any of the above methods.

Since the reserve funding requirement is a function of the aggregate remaining lives of all components combined, the more accurate the remaining life estimate, the more accurate the funding plan. For those associations that use a baseline funding goal, any significant reduction in estimated lives remaining can plunge them into special assessment territory. That’s one of the reasons why our booking research company continually recommends against using a referral financing plan. It just doesn’t leave room for significant changes in remaining useful life or replacement cost.

A word of warning here: many times we have gone to the site for the first visit of an Association that is a new client to our Company and, while having our initial discussion with the Association’s administration and maintenance staff, we are told that they intend to repave the streets (or choose any other activity in the reserve) simply because the previous study of the reserve says that now is the time to do it. That is putting the cart before the horse. The reserve study should be based on your maintenance plan, and your maintenance plan should be based on operational maintenance activities and the physical condition of the components. Although the study of reserves can be the financial representation of a maintenance plan, it is not in itself a maintenance plan. Don’t confuse the two.