Trees and Landscaping: Operating or Reserve Expense?
The Community Associations Institute’s Reserve Study Standards do not present a minimum cost threshold for a component’s inclusion as either a reserve or operating expense. While certain components, like roofs, streets, and pools, are clearly capital intensive and fall within the reserve expense threshold, the classification of components like landscaping and trees can be more ambiguous. The threshold for what is assumed to be a reserve expense or operating expense is not consistent between reserve study providers and will always be determined on a case-by-case basis, as it will align with each association’s unique budget and preferences. While this threshold is flexible, it is not an estimate and should be determined alongside a reserve study professional with experience in capital reserve budgets and life cycle cost analyses. When a reserve study is compiled, providers should include a section detailing the items under this threshold – for example, mulch in a playground. Say an association has a large playground whose mulch is supplemented annually for $1,000. This would be assumed to be an operating expense and called out as such in the reserve study report, as it is a low, predictable annual cost. However, if the association would prefer a full replacement of the mulch every three years, totaling $3,000. This association would work with their provider to tweak the reserve study, re-classifying the mulch as a reserve expense and funding it as such. In most cases, landscaping is not a reserve component but an operating expense. Most reserve study providers default to excluding landscaping from the study for multiple reasons. First, landscaping is unpredictable, whereas the useful lives of typical reserve components such as roofs, pavement, and heating systems can be accurately estimated. Landscapers or arborists can predict how long trees will last, but because they are living, breathing, and easily damaged by the elements, it is almost impossible to accurately predict the useful life of living landscapes. However, there are certain situations in which landscaping projects may be included in the study as a reserve component. Master associations, or HOAs spanning multiple neighborhoods, oftentimes do not seek to simply maintain their landscaping, but prefer to completely update or redesign their landscaping every 10-15 years or on a set periodic basis. These projects would be included as a reserve expense as they are predictable in both time and cost (given the association has this information from their landscaping company), and because they are capital-intensive, likely fall above the minimum threshold cost for reserve components. Additionally, a landscaping re-design would be classified as a capital improvement project as it is an upgrade, not a replacement with like-kind materials. Older communities with many mature, large trees may know they need to remove and replace them within a certain time frame. When there are numerous trees to remove, especially if they are full-grown, removal projects can cost anywhere from $10,000 – $15,000 or more, therefore making it a reserve expense. Similarly, large associations or communities with a large number of landscaping elements most likely expend money on trimming, pruning, or upkeep on a predictable, periodic schedule. If an association has a solid grasp on the cost and frequency of this upkeep, such as knowing they spend $50,000 on pruning every 3-5 years, this could be worked into the reserve study. In summary, while landscaping is generally treated as an operating expense due to its unpredictability and maintenance nature, certain large-scale or periodic projects may qualify as reserve components. Associations should collaborate closely with reserve study professionals to accurately classify and fund these expenses, ensuring their financial planning aligns with their long-term maintenance and improvement goals.
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