Using a Reserve Study to Simplify your Life

by Robert M. Nordlund, P.E., R.S.
President
Association Reserves, Inc.

Typically viewed as a budget preparation tool, a Reserve Study can be a powerful force at a resort to save management time and owner money. Historically, Reserve Studies compiled a laundry list of major (and not-so-major) components the resort was obligated to maintain, projecting life cycle and replacement cost estimates. That list typically got longer and more complicated as stray projects got added to the Reserve Study, making the Reserve Study gradually more unwieldy, unworkable, and unimportant.

This can be avoided with a Reserve Study that specifically focuses on the objective of helping the resort plan ahead for the repair and replacement of major components instead of becoming an inventory and history of every asset that has been purchased.

A Guideline for Responsible Planning.

Fundamentally, a Reserve Study is a budget preparation guide and forward planning tool. However, there are and always will be, exceptions to every well-laid plan. The wisdom is knowing when that plan needs to be adjusted by excluding projects that are the exception and can be better served outside the Reserve Study.

Time is saved, and money is saved, when projects can be accomplished with economies of scale and in a consistent, repeatable manner. The opposite is what we call “checker-boarding”. This is when exceptions are allowed to become the norm, and uniqueness becomes commonplace. The resort becomes more difficult to manage because replacements begin to occur at different points in time, styles don’t match, and economies of scale are lost. Fundamentally, it begins to take more time to manage the assets, and it begins to take more money to replace the assets.

Defining Projects vs. Exceptions

Accidents will always happen. A chair will be broken, a dresser drawer will break, a water leak will stain a wall and a carpet. Memorializing an exception by adjusting the Reserve plan is a mistake. Make the repair, make the room usable and attractive, and move on. Yes, the newer carpet will not need to be replaced when it is time to replace the carpet in all the other rooms, but go ahead and replace the still “fair” condition carpet in the water-damaged room. Similarly, a replaced Formica countertop or a re-upholstered reading chair should be replaced or re-upholstered with all the other rooms.

When you make the decision to do soft goods or case goods refurbish of the rooms, make a good decision and apply that design to all applicable rooms. Just because you bought new entertainment armoires in 18 of the 68 units a few years ago, that doesn’t mean that next time you should only buy 50 armoires. Next time around, buy all 68 new armoires and get back on track. Get back in control. Don’t allow an exception here or there to define how the resort appears or the running of the resort. When an exception is made, that does not mean you should revise the Reserve Study or your plan to replace all assets as one project at the next opportune cycle. This is where you choose to control the Reserve assets, instead of letting them begin to control you. The Reserve Study is a budget plan. Let exceptions remain exceptions. Keep the integrity of the plan.

Recognizing Randomness

There are some assets for which randomness can be appropriate, can be acknowledged, and can be incorporated into an effective Reserve Study plan. You may find that due to your ownership makeup, the climate, or the floor plan, housekeeping is reporting a few living room reading chairs are needing to be replaced every time you turn around. This may be due to the sunlight though the window, losing its shape in the humidity, getting wonderfully high wear and tear, or becoming easily stained from moisture from windows that are regularly left open. Or you may find that due to the layout of the bedroom, the bedroom lamps will always be subject to being knocked over and breaking. In your 100-room resort, you may acknowledge this situation and decide that from this point forward, you’ll buy replacements in quantities of 10 or 20, and replace them on an as-needed basis. Attempting to “control” an uncontrollable replacement scenario is an exercise in futility. Attempting to track the three you replaced in February, the 12 you replaced before last summer, anticipating replacing 8 more before Labor Day, etc., is a waste of time. These assets don’t have predictable useful lives or remaining useful lives, they need to be replaced in an unpredictable manner. As such, they fail the definition of Reserve components! Handle them as permanent exceptions, and define them as “effectively random”, planning to replace an average number each year on an ongoing basis.

Saving Time and Money

The key is seeing the Reserve Study as a planning guide, not a record-book. Maintaining a consistent appearance throughout the resort is a desirable objective, but even more desirable is saving time and money. All three can be accomplished when you determine to proactively plan your Reserve expenditures managing replacement projects instead of letting them manage you. It actually costs the resort money by loss of economies of scale and added management time if you continue to acknowledge exceptions by replacing them when they get old rather than with the majority of other similar assets. Checker-boarded resorts are time-consuming to manage, and an example of a poorly implemented Reserve plan. Don’t let it happen to you!