Replacement Reserve Studies and Functional Obsolescence

Common interest communities, country clubs and private membership clubs of all sorts have common areas which are shared and utilized by the dues paying members and their guests. These common areas typically include recreation buildings, workout rooms, swimming pools, BBQ, areas all of which deteriorate with time and use. With respects to replacement reserve studies we are concerned with the adequate funding for these common areas over a long period of time (30 years is typical) while taking into account that the expenses should be equally shared among those members that are utilizing the common areas during their respective time as dues paying members.

This deterioration to the common areas is sometimes very apparent (such as a leaking roof or peeling paint) but other times there is a question as to the usefulness of common area components which is still functional even though outdated. This is the where the term Functional Obsolescence comes in to the equation. The above picture is before & after of an HOA clubhouse kitchen which has been remodeled. The outdated kitchen on the left is fully functional but very outdated, has stains and odors from 30+ years of parties. It was reported that this kitchen was utilized very little in the past 5 years and many members were complaining that it needed updating. After all they were paying due to use it…

Well the kitchen did get remodeled and we completed a reserve study so that they could begin to budget for the inevitable remodel again this time on an agreed 25 years though (as the last 5 years had little use)… While there is no definitive line that was crossed it is safe to say that during the last 5 years the old kitchen was functionally obsolescent (i.e. it had a significant reduction in usefulness and desirability) due to outdated styles, colors, smells, materials, membership desirability, etc. The community membership agreed with this judgement as they were not utilizing it – nobody wants to throw a party for family and friends in outdated and smelly rooms. Again the kitchen was still fully functional – but is that the sole purpose of a common area? And should we be taking this Functional Obsolescence into consideration in a reserve study? We come from the position of yes it should be considered and here is why…

What was and is the Intent of the Common Area?

When the community was created the common areas (specifically this kitchen and recreation room) were meant as meeting and gathering areas both for community events like HOA meetings as well as for community members to use for visiting family and friends – anything from birthday parties to book clubs. It was reported to us that this area of the community was used regularly for 25 years. There was the typical maintenance – painting and cleaning of the kitchen but no significant remodels. This area met the demand of the community membership and proved to be a significant asset to the membership, particularly to those that actually utilized it. But at some point people began to question whether there needed to be updates or a remodel completed.

Everyone will have a different opinion of “when” something is outdated but at some point (probably about the time we were called) the majority of the community decided it was time to do something about it. There was definitely a portion of the community which did not want to do anything with the kitchen as they stated it was still fully functional and they didn’t want their dues to increase. So we needed to ask the community Board – What is the intent of the Common Area? A majority of the community membership agreed, after some discussion, that this was still a gathering and party area for the community members to utilize. It was also agreed that the current state of the kitchen was not up to the majority of the community member’s standards and expectations for this use (and why it was rarely used in the last 5 years). The majority of the community voted that a remodel was in order and they voted for just that – a full remodel and an increase in the dues so that the reserve allocation amount could be increased to correspond with the deterioration to this new kitchen (yes, it begins to deteriorate and slide toward the invisible line of being functionally obsolescent right away). And guess what – we checked back six months later and the kitchen & recreation room have been utilized regularly again. This is exactly how Functional Obsolescence impacts common interest community common areas and in our opinion should be considered for in the reserve funding of a community. With adequate planning and budgeting this community will be able to remodel this kitchen every 25 years and there will be no period of significant reduction in use and desirability of this common area.

As reserve study​ professionals it is first our main objective to determine what the goals of the community are and go from there. If we are instructed by the Board that the majority of the community was fine with the kitchen and did not want any significant remodel then our study would have shown just that – an outdated but functional kitchen and no significant funding for the full remodel in the foreseeable future. A smaller refurbishment contingency would have likely been the course of action in the reserve study with comments to possibly fund for full remodel in an update to the study at a future date. This community, as do most, decided that the Functional Obsolescence associated with the kitchen was not in line with the standards and expectations of the membership and the intent of this common area was no longer being met.

A disclaimer here – some get the idea of functional obsolescence confused with condition deficiencies – (e.g. a leaking roof is not functional obsolescence and needs to be replaced right away). If any component of a common interest community is failing, causing damage is a safety concern or is outdated to a degree that it is no longer functional with modern equipment – it needs to be replaced and adequately funded for.