3 Main Steps in Preparing a Reserve Study

The preparation of a Level I Reserve Study can be broken down into three main steps:

1.  Component Analysis

All components the Association has an obligation to maintain are identified and inventoried.  Per RCW 64.34.382(2)(a), this list includes the following: roofing, painting, paving, decks, siding, plumbing, windows, and any other reserve component that would cost more than 1% of the annual budget for major maintenance, repair, or replacement.

An onsite visit is scheduled to visually inspect all common area components.  This inspection is limited to components that are normally visible without destructive or intrusive means of inspection or testing, or concealed mechanical, electrical, structural, or other components.

The Useful Life, Remaining Useful Life, and Current Replacement Cost of each component appropriate for reserve funding is established using information entered into a Commercial Cost & Useful Life Database.  The data is based upon industry standards, manufacturer’s specifications, and/or the actual repair and replacement costs to similar residential and commercial properties.  Costs of repairing or replacing components can vary greatly depending on current labor costs, material costs, and the conditions of the component.  Wherever possible, actual quotes from local contractors are used as a comparison.

Financial Analysis

The Association provides the following financial information:

  • The Association’s current Reserve Balance.
  • Current rate of investment on Reserve Fund.
  • Special Assessments already implemented or planned.
  • Tax rate applied to interest or dividends earned on the invested Reserve Funds.
  • Interest and Inflation assumptions.
  • Current Reserve Account Contribution Rate.
  • Date of Fiscal Year End (FYE).

3.  Reserve Study

The information obtained during the Component Analysis and Financial Analysis is entered into a Reserve Study Funding Plan computer program.  The program calculates the necessary monthly and annual reserve contribution, projected annual expenditures for repair and replacement of identified components, percent funded, and reserve account balances for the analysis period.

Per RCW 64.34.382(i) and 64.38.070(i) the following Reserve Study Funding Plans are created:

  • A recommended reserve account contribution rate.
  • A contribution rate for a full funding plan to achieve 100% fully funded reserves by the end of the 30 year study period.
  • A baseline funding plan to maintain the reserve balance above 0 throughout the 30 year study period without special assessments.
  • A  Reserve Study Professional recommended reserve account contribution rate.

The computer program provides a projected reserve account balance for 30 years and a funding plan to pay for projected costs from those reserves without reliance on future unplanned special assessments.

Open Lines of Communication

During the course of the construction project, communication channels with the homeowners need to be set-up.  The homeowners should be informed on a regular basis exactly of what is happening, who is on-site, what they are working on, and how work is progressing.  These channels of communication may include:

  • Scheduling information meetings.  These meetings should allow an information exchange between the construction professionals and allow for a question and answer period.
  • Sending a newsletter to the homeowners in regular intervals.
  • Having the construction professionals available for direct communication with the homeowners during general meetings
  • Providing good minutes that adequately summarize information exchanges and decisions following general meetings.
  • The General Contractor may have a full time liaison assigned to the project, a dedicated website for owner updates, or other systems in place to facilitate clear lines of communication.

Resolving Construction Disputes

Situations may occur that lead to disagreements between the homeowners and the contractor.  When and/if this does happen, it is important to have a mechanism in place to solve these problems and avoid costly construction delays.  In many cases, a construction manager can handle conflict resolution.  However, a construction attorney should be consulted during the drafting of the contract in order to ensure there is a clause that provides a streamlined dispute resolution procedure.  This will save time and money.  The clause will typically have three elements:

1. The parties will agree to attempt to negotiate in good faith.

2. If that does not work, the parties agree to mediation.

3. If that does not work, the parties agree to arbitration.