Purpose

The purpose of a Reserve Study is to recommend a reasonable annual reserve Contribution Rate made by an association to its reserve account. Reserve accounts are established to fund major maintenance, repair, and replacement of common elements, including limited common elements, expected to be necessary within the next thirty years. A Reserve Study is intended to project adequate funds for the replacement or major repair of any significant component of the property as it becomes necessary without relying on special assessments. It is a budget planning tool which identifies the current status of the reserve account and a stable and equitable Funding Plan to offset the anticipated future major shared expenditures.

Components Evaluated

Components required to be included in a reserve study are slightly different for condominium associations and homeowners’ associations. Refer to the applicable government requirements listed below. Once the component list has been determined, each reserve component is evaluated to determine the current condition, the remaining useful life, and the estimated replacement cost. This information is combined into a spreadsheet to determine funding requirements and establish the annual contribution rate needed to minimize special assessments. All costs and annual reserve balances are shown in constant dollars, and with adjustments for annual inflation and interest earned. Ideally, an even level of contributions is established that maintains a positive balance in the reserve account over the timeline the study examines.

Fully Funded Balance

A Reserve Study also calculates a “Fully Funded Balance”. Fully Funded Balance is the sum total of the reserve components’ depreciated value using a straight line depreciation method.

When assessed with the current reserve balance, the Fully Funded Balance yields a Percent Fully Funded. This acts as a measuring tool to assess an association’s ability to absorb unplanned expenses. These expenses could be emergency repairs not covered by insurance, or expenses that differ from the existing Reserve Study in terms of timing or cost.

The Fully Funded Balance is neither the present replacement cost of all of the Association’s reserve components, nor does it have a mathematical relationship to the recommended reserve contribution funding plans.

Limitations and Assumptions

A Reserve Study is not a report on the condition of the buildings maintained by the Association, or a detailed report of repairs necessary to the building. It is also not an investigation into or comment on the quality of construction of the reserve components, or whether the construction complies with the building code or the requirements of the Washington Condominium or Homeowners' Association Act.

The observations made by RCL are limited to a visual inspection of a sample of the reserve components. Unless informed otherwise, our assumption is that the components are constructed in substantial compliance with the building code and to industry standards, and that it will receive ordinary and reasonable maintenance and repair by the Association. These assumptions include that most reserve components will achieve their normal useful lives for similar components in the Pacific Northwest, and that they will be replaced when necessary to prevent damage to other reserve components.

Reserve Disclosure

RCL will compile a Reserve Disclosure at no additional charge within one year of issuing the draft report of an association’s reserve study.

While associations are not required to have reserve studies that comply with the Washington Uniform Common Interest Ownership Act (WUCIOA), we recognize that budget ratification is regulated for all common interest properties, including condominiums and HOA's, per RCW 64.90.525. We have ensured that our reports and Reserve Disclosures comply with WUCIOA.

It is our understanding that common interest properties are required to provide the information required in RCW 64.90.525 (WUCIOA), and no longer obligates them to provide a different disclosure from RCW 64.38.025 (Homeowners' Act Act) or RCW 64.34.308 (Condominium Act). Since the legislature is not absolutely clear on this intent, we provide Reserve Disclosures that comply with all three statutes.

RCW 64.90.525 (WUCIOA) requires that within thirty days after adoption of any proposed budget for the association, the board of directors shall provide a summary of the budget to all the unit owners and shall set a date for a meeting of the unit owners to consider ratification of the budget not less than fourteen nor more than fifty days after mailing of the summary.

As part of the summary of the budget provided to all unit owners, the board of directors shall disclose to the unit owners:

(a) The projected income to the association by category;

(b) The projected common expenses and those specially allocated expenses that are subject to being budgeted, both by category;

(d) The current amount of regular assessments budgeted for contribution to the reserve account;

(e) A statement of whether the association has a reserve study that meets the requirements of RCW 64.90.550 and, if so, the extent to which the budget meets or deviates from the recommendations of that reserve study; and

(f) The current deficiency or surplus in reserve funding expressed on a per unit basis.

The Reserve Disclosure issued by Reserve Consultants LLC fulfills the requirements of RCW 64.90.525 §2 (d) – (f).

While not required, the Reserve Disclosure that complies with RCW 64.34.308 (for condominiums) and RCW 64.38.028 (for homeowners’ associations) discloses the following information:

(a) The 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;

(b) 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;

(c) 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;

(d) 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;

(e) 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;

(f) 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

(g) 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.

WA Legislature

Condominium Associations – Government Requirements for a Reserve Study may be reviewed on the Washington State Legislature’s website >>

Homeowners’ Associations – Government Requirements for a Reserve Study may be reviewed on the Washington State Legislature’s website >>