In order for the Reserve Study to be as accurate as possible, the Board of Directors should plan on the following:
- Review the Reserve Component List compiled by the Reserve Study provider to ensure all major components are included. For Condominiums, RCW 64.34.382(a) provides a list of components which are to be included. Any of these required items that are not included need to be listed and a basis for their exclusion needs to be provided.
- Provide information on the condition of major components, including maintenance records.
- Direct the Reserve Study provider as to any desired changes or additions (i.e., new items) in the Reserve Component List.
- Provide a copy of as-built construction drawings, if they exist.
- Provide maintenance records, component warranties, or other documentation.
- Provide the current year’s starting reserve account balance.
- Provide the current monthly contribution to reserves.
- Provide the rate of return on the invested reserve funds.
- Provide information on whether any special assessments are in place or anticipated for that year.
- Provide what reserve expenditures are anticipated for the current year.
For both Condominium and Homeowner Associations, effective January 1, 2012, per RCW 64.34.308 and 64.38.025, there is a new requirement that Reserve Study information be disclosed along with the summary of the budget. Specifically, as part of the summary of the budget provided to all unit owners, the Board of Directors shall disclose to the unit owners:
- Current amount of regular assessments budgeted for contribution to the reserve account, the recommended contribution rate from the Reserve Study, and the funding plan upon which the recommended contribution rate is based;
- If additional regular or special assessments are scheduled to be imposed, the date the assessments are due, the amount of the assessments per each unit per month or year, and the purpose of the assessments;
- Based upon the most recent Reserve Study and other information, whether currently projected reserve account balances will be sufficient at the end of each year to meet the association’s obligation for major maintenance, repair, or replacement of reserve components during the next thirty years;
- If reserve account balances are not projected to be sufficient, what additional assessments may be necessary to ensure that sufficient reserve account funds will be available each year during the next thirty years, the approximate dates assessments may be due, and the amount of the assessments per unit per month or year;
- The estimated amount recommended in the reserve account at the end of the current fiscal year based on the most recent reserve study, the projected reserve account cash balance at the end of the current fiscal year, and the percent funded at the date of the latest reserve study;
- The estimated amount recommended in the reserve account based upon the most recent reserve study at the end of each of the next five budget years, the projected reserve account cash balance in each of those years, and the projected percent funded for each of those years; and
- If the funding plan approved by the association is implemented, the projected reserve account cash balance in each of the next five budget years and the percent funded for each of those years.
Due to these new requirements, associations will need to assemble more information before the budget delivery deadlines outlined in the governing documents. Because of this, we would recommend associations have their Reserve Studies prepared earlier than they would in years past so there is plenty of time to assemble everything for the annual meeting.
Declarants, per RCW 64.34.410, are to include in the Public Offering Statement a copy of the current Reserve Study, or, the following disclaimer:
“This association does not have a current reserve study. The lack of a current reserve study poses certain risks to you, the purchaser. Insufficient reserves may, under some circumstances, require you to pay on demand as a special assessment your share of common expenses for the cost of major maintenance, repair, or replacement of a common element.”
Many associations assume, once the Declarant transfers control, that they are adequately funding their reserves because they are following the Reserve Study that was prepared by the Declarant. However, this is not necessarily the case and there are several possible shortcomings to a Reserve Study prepared as a part of the Public Offering Statement. Typically, the Declarant prepared Reserve Study:
- Is used primarily as a means to estimate the monthly reserve contributions in the association’s first year budget.
- Was likely prepared significantly before the project was actually completed. As a result, the estimates may be dated by the time the first unit is sold.
- Will typically show the allocation of reserve expenses in constant dollars and not inflation adjusted dollars.
- May have maintenance/repair/replacement costs provided by the same contractors and sub-contractors used during the construction. Costs for new construction are often times significantly different from repair/replacement costs. These contractors may not take into consideration any cost adjustment for owner occupied buildings, tear-off and disposal of materials, etc.
- May not accurately reflect local conditions when showing the estimated useful life of components.
- May not have an accurate list of components the association is responsible for maintaining. Only certain major components (e.g., roofing, painting, paving, etc.) may be included. Some components that are commonly excluded include: Alarm systems, fire and intrusion; Antenna, satellite dish and other; Display cases; Docks; Drainage systems; Electrical transformers; Electrical wiring and related fixtures in common area; Fans, exhaust, garage and other; Fire sprinklers and related equipment; Fountains; Garage doors and hardware; Garbage enclosures; Gutters and downspouts; Irrigation system, piping, valves and sprinkler heads; Kiosks and message/communication centers; Lakes, ponds and waterways; Landscaping, replacement of major trees and plants; Mailboxes and centers; Monitoring system, carbon monoxide; Planter boxes; Plumbing fixtures, exterior; Plumbing, water piping system; Posts, deck, lamp, etc.; Pumps, lakes, ponds and waterways; Racquetball courts; Security gates, gate operator and motor; Septic tanks; Sewage ejector equipment; Skylights; Slopes; Stairs; Stucco, sandblasting and resurfacing; Sump pump equipment; Trellises; Ventilation systems, garage; and Walkways, wood, brick, tile, etc.
Therefore, it is highly recommended that once the Declarant transfers control of the association, the association conduct its own reserve study.
If you have not heard by now, per RCW 64.34.380 and 64.38.065, Condominium and Homeowner Associations In Washington are required to establish a reserve account as well as prepare and update a Reserve Study. But, aside from being a legal requirement, what is the importance of a Reserve Study?
The following are the top ten reasons to have a Reserve Study completed:
- Comply with statutory requirements.
- A Reserve Study reduces the risk of special assessments and borrowing.
- A Reserve Study assists the Board of Directors with its fiduciary responsibility to protect the association from financial hardship.
- A Reserve Study assists the Board of Directors with its fiduciary responsibility to maintain the community in a good state of repair.
- A Reserve Study enables major repairs to be scheduled during more convenient times.
- A Reserve Study establishes a fair contribution for both current and future owners.
- A proper Reserve Study will comply with the American Institute of Certified Public Accountant’s annual audit requirements.
- Reserve Planning allows time for the Board of Directors to solicit competitive bids and to evaluate contractors.
- Reserve Planning helps protect against declining property values due to deferred maintenance and inability to keep up with aging components.
- A Reserve Study enhances an association’s ability to obtain loans.