When creating a component list and developing a funding plan to compile all the data needed for a comprehensive reserve study a reserve professional takes into account national reserve study standards. The final reserve study will not have all actual expenditures for a community over 30 to 50 years. Outside of the separate operating and maintenance expenses there will inevitably be surprise expenses of common area components.
Surprise costs should be an extremely rare event for a community that has done their due diligence overtime, however it has been our experience that they do happen occasionally. These surprise cost can usually be attributed to incorrect installation or unknown factors such as soil or material faults. When these are discovered a short time after an install they will often results in litigation or insurance claims however many years down the road these are typically not an option as vendors may no longer be in business or statutes of limitations has expired.
One of the most common surprise expenses that we have seen has been for plumbing issues. This can often be due to failing materials of piping, root intrusion or geographical factors. These types of factors cannot typically be accurately projected for by a reserve professional. However once cost associated with this item have taken place the reserve specialist can include them in an update to a reserve study and they can be adequately budgeted for into the foreseeable future.
For items such as plumbing there's not typically a full-scale failure of the system but essentially failures in different areas at different times; this can often be addressed with a contingency component in a reserve study for a specific percentage repair annually or per the historical expectations. In the extremely rare event when the whole system needs repair and or replacement immediately a special assessment or loan may be the best option.
Updates to a Reserve Study to Address Surprises
A reserve study is a constantly changing and evolving product which should be updated as goals of a community change, the age of the community changes and these surprise expenses occur. Most of the time these "surprise" expenses are actually years in the making (periodic failures before large scale failures or expenses) and could have been adequately funded for well in advance with an update to reserve study.
Written by Joel L Tax - Professional Reserve Analyst - 04/26/2016