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, classifying 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 is determined on a case-by-case basis, aligning with each association’s unique budget and preferences. While this threshold is flexible, it is not an estimate and should be determined with a reserve study professional experienced 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. For example, an association may have 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 prefers a full mulch replacement every three years, the total would be $3,000. This association would work with their provider to tweak the reserve study, reclassifying the mulch as a reserve expense and funding it as such.
In most cases, landscaping is an operating expense, not a reserve component. Most reserve study providers default to excluding landscaping for several 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, landscaping projects may be included as a reserve component in certain situations.
Master associations, or HOAs spanning multiple neighborhoods, oft
entimes 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 because they are predictable in both time and cost (given the association has this information from its landscaping company) and, because they are capital-intensive, likely fall above the minimum threshold cost for reserve components. Additionally, a landscaping redesign 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 to $15,000 or more, therefore making it a reserve expense. Similarly, large associations or communities with many landscaping elements most likely spend 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 work closely with reserve study professionals to classify and fund these expenses accurately, ensuring their financial planning aligns with long-term maintenance and improvement goals.