Adequate reserves are important to maintain property values and avoiding large special assessments. Most importantly, reserves increase the marketability of homes or condo units. Savvy buyers will base much of their purchase decision on whether or not there are adequate reserves. Typically, the amount of reserves is based upon a reserve study. The reserve study identifies all of the common property or common elements which the association is obligated to maintain, repair or replace. For single family home communities, this often includes entrance gates or monuments, play structures, fences or roads. For condominium communities, reserves are used to maintain or replace roofs, siding, clubhouses, decks and other limited or general common elements.
There are two components to reserves: the financial and the physical. A qualified professional first identifies all of the physical components of the community. Next, a reserve study and financial analysis are prepared showing how much money must be reserved. For example, if the professional indicates that the condominium roof must be replaced in 18 years, the reserve analysis will indicate how much money the association must save on a regular basis so that in 18 years it will have the necessary funds to pay for a complete roof replacement.
When choosing a reserve study provider, make sure the company carries liability insurance. If the association has complicated reserve items, it’s usually best if an engineer or architect conducts the site visit and reserve study.
Here’s an overview of the legal requirements in Oregon and Washington:
- Reserve account must be established for all improvements which require major maintenance, repair or replacement in more than 1 and less than 30 years.
- Amount of reserves must be based on reserve study or other reliable information.
- Must perform reserve study (or review) annually and update accordingly.
- Reserve study must include:
- All items for which reserves are established - Remaining useful life for those components - Estimated costs of repair, maintenance or replacement
- Association may borrow from reserves for unforeseen expenses, but must do so with a resolution stating how and when the money will be returned to reserves.
- Non-condominium associations are “encouraged” to have reserves.
- Reserve account must be in the name of the association and administered by the board of directors.
- Amount of reserves is based on reserve study, which must be updated by a visual site inspection every three years by a “reserve study professional.”
- Reserve study must include:
- Component list - Date and statement of compliance with RCW - Level of detail of the reserve study - Association’s reserve balance - Other financial information - Reserve disclosure
- Association may borrow from reserves to pay for unforeseen or unbudgeted costs, but must do so by resolution sent to owners which explains when and how the funds will be repaid into the reserve fund.
- Association may be exempt from reserve requirements if there are 10 or fewer homes or units.