Turnkey Infrastructure as a Solution to Reserves

Turnkey: Infrastructure as a Solution to Reserves

by Michael J. Tari Ph.D.

Many HOA’s are unaware there are companies that provide turnkey solutions for infrastructure.  These companies employ service-based, pay-as-you-go models (similar to ones employed by utility companies) that focus on maintenance and transform infrastructure into a service.  This type of service can relieve associations from the typical burdens associated with infrastructure, such as installation, ongoing upkeep and (maybe most importantly) having to deal with special assessments and reserve shortfalls.

Infrastructure, like water and electricity, is ultimately consumed.  Although the latter two are typically consumed over a short time, infrastructure is ultimately used-up as well.  Unfortunately, “dust you are and to dust you shall return”¹ also applies to, for example, roofs, HVAC systems and structural components of buildings.  Therefore, thinking of infrastructure as a consumable, rather than an asset, may help associations better frame the infrastructure challenges many of them are facing.  (Afterall, an “asset” is supposed to increase in value and kick-off a dividend, whereas infrastructure continually depreciates and costs money to maintain.)

An association typically procures water and electricity as a service and through a turnkey solution known as a “utility.”  In exchange for a monthly charge (typically communicated via a water or electricity bill), the utility company handles all of the challenges (i.e. headaches) associated with the consumable.  These challenges include funding new equipment and ongoing maintenance as well as reserving for the future infrastructure needed to provide the service.

Water and electricity are generally obtained through a utility because a utility model provides the best (i.e. lowest cost, steadiest rate and easiest) platform to generate the service.  The cost-savings, and monthly-bill consistency, associated with a utility model exist because the utility 1) purchase robust equipment at the outset, 2) maintains the equipment and 3) steadily reserves for the equipment’s maintenance/replacement.  By following these three tenants, a utility-model is able to deliver a turnkey solution that saves money, allows for budgeting, does not require the consumer to reserve for the equipment used to generate the service and, maybe most importantly, eliminates the brain-damage the consumer would have to go through if they were forced to generate the water and/or electricity themselves.

The cost savings mentioned above can be better understood by thinking about the lifecycle cost of a piece of infrastructure.  Lifespan costs are driven by 1) the initial cost of the infrastructure, 2) the cost of capital (opportunity or financing) required to purchase the infrastructure and 3) the useful life of the infrastructure.  Of these three, the one under the most control by the party responsible for the infrastructure is its useful life.  Through the implementation of a rigorous maintenance program, the cost of infrastructure per unit of time can be significantly reduced.

A simple example may be helpful here. Suppose two different associations each pay $200,000 for roof.  The first association does not maintain its roof and it last 20 years.  The second association makes sure the roof is maintained and it lasts for 25 years.  The first association has paid $10,000 per year for its roof, while the second association has only paid $8,000 per year.  After 20 years, the second association has saved $40,000 when compared to the first and, maybe more importantly, has five more years to deal with the replacement of its roof.  Also, there are ancillary financial benefits to the second association (such as lower insurance costs due to the relative shape of its well-maintained roof) the example above does not account for.

As turnkey, maintenance-focused, solutions for infrastructure become more common, associations may want to consider them as an option to overcome their infrastructure challenges.  A service-based, pay-as-you-go model for infrastructure may be a useful “easy button” for association boards and may also reduce infrastructure usage costs, special assessment burdens and reserve requirements for association members.

Michael J. Tari, Ph.D. is a Partner at Sustainability Partners (SP), where his responsible for designing and implementing complex infrastructure solutions for communities. Before joining SP, Michael worked on Wall Street as a senior trader, portfolio manager and strategist. Michael holds both Ph.D. and M.S. degrees in Mechanical Engineering from the University of California, Los Angeles and a B.S. in Mechanical Engineering from Rutgers, The State University of New Jersey. For questions regarding this article you may contact him at [email protected]