What is a long-lived asset?
Long-lived assets or components are those which do not have a predictable remaining useful life, or their replacements are beyond the scope of the reserve study. When conducting a reserve study, one of the first steps your consultant will take is evaluating the inventory of your community’s components and classifying them into groups, with reserve studies focusing most prominently on reserve components. However, long-lived assets are equally as important to keep an eye on.
Assets or components that are considered long-lived are those that have a useful life extending beyond the 30-year length of the study’s capital plan. For example, elements such as structural frames, electrical systems, and piping systems can have useful lives of up to 60 years or more, and would not be included in the reserve study when they are brand new. However, the classification of such items as long-lived varies based on the age and condition of the components.
For instance, a brand new association’s electrical system would be considered long-lived, as the useful life will extend far beyond the scope of the study assuming the system is well-constructed and defect-free. However, if an association is older or the condition of the electrical systems has been damaged in some way, it is no longer considered long-lived if its replacement falls within the 30-year scope of the study.
Are long-lived assets included in reserve studies?
In 2023, Community Associations Institute (CAI) revised its National Reserve Study Standards, which are followed by most reserve study providers. Firms that comply with the Standards are required to disclose any and all long-lived assets within the component inventory regardless of whether or not there are anticipated expenditures within the 30-year scope of the study. Standardization of addressing long-lived assets within a reserve study ensures community stakeholders have a clear understanding of association maintained assets and greater visibility into the true cost of property ownership.
There are cases in which a component would be considered long-lived when the study is conducted, but partial funding accumulation of reserves could be considered. For example, if an electrical system will need replacement in 35 years, some firms take into consideration that while not within the 30-year scope, partial funding could be advantageous when included in the study’s capital plan. This is so that further down the road, an association won’t be scrambling or making dramatic reserve fund increases to play catch up in order to complete the project in a timely manner. At a minimum, once the asset’s repair or replacement falls within the 30-year scope, the system is considered a reserve expenditure that would be included in the study’s reserve funding plan as it will need updating within the next 30 years.
If your study’s funding recommendations present any large increases as a result of including funding for future expenses related to long-lived assets, your reserve study consultant can justify this to the board by explaining that a big-ticket item such as piping will be on the horizon shortly after the scope of the study. To the resident’s benefit, in order to avoid large fee increases down the road, project funding preparation should begin sooner rather than later, especially because items that begin as long-lived are usually quite capital-intensive when the time comes to replace them.
What’s the bottom line?
Though there are exceptions or outlying circumstances as outlined above, the bottom line is that assets are long-lived if their useful life extends beyond the 30-year scope, and turn into reserve components when their inclusion in the funding plan becomes necessary due to age or condition.
If you have questions or concerns regarding your community’s long-lived assets or wish to discuss their partial funding in your study’s capital plan, your reserve study consultant will work with you to determine the best and most efficient way to handle the funding of these items if applicable.