Establishing a Reserve Account

Many smaller communities have not established reserve accounts for their communities. Often this is because they are not yet old enough to see the larger common area expenses occur while others have just relied on special assessments when they do.

I spoke with a Board President the other day who was upset about having to obtaining a reserve study to comply with WA State RCW requirements. He felt they were adequately prepared for the expenses in the community and had a good handle on the ongoing maintenance expenses each year. In this case he was calling because a member of the community was having difficulties selling their condo unit as the Lender would not proceed until a reserve study could be furnished to show the long term expenses the community had and a funding strategy to pay for them. Additionally it was this unit owner's lawyer who contacted the President threatening litigation, I understand why he was upset about the whole issue but then I inquired to learn a bit more about the community and he told me they had only $950 in a reserve account for a community of 20 units and which is almost 20 years old. This is not a good situation and is unfortunately all too common especially for smaller communities which are self managed.

Often Boards are confused about what a reserve study is and how it can be utilized successfully for the long term goals of that community. In this case this Board President was under the impression that  reserve study was just going to show the maintenance costs associated with the ongoing maintenance of the common area; an amount he was already familiar with having been the President for many years. He didn't know about the longer term expenses related to replacement of these common areas. The roof, siding, paint, fencing, asphalt, etc. all have ongoing annual inspections and maintenance associated with them but eventually all will require full replacement. Often Board members who are not familiar with building/site components will have the incorrect notion that these component will last indefinitely if properly maintained and make decisions to keep HOA dues as low as possible often at the request of the community membership. This approach does nothing to prevent the larger replacement expenses for common areas which will occur whether the community is prepared or not.

Establishing a reserve account for the much larger but less frequent replacement & refurbishment of the common area components is vital for the long term financial health of a community. These longer term replacement expenses often occur only every 20-30 years (roofing, asphalt overlay, fencing, siding, windows, etc.) but will cause financial turmoil and special assessments on the membership when they do eventually occur.

Our reserve studies provide long term forecasts of expected common area components expenses related to the common areas maintained by the Association of Common Interest Communities. Our funding plans developed and catered to each community provide realistic strategies to fairly and adequately fund for the expenses so the overall costs are minimized (interest earned on the saving account) and numerous Boards over an extended period of time can follow them to move on a fiscally responsible path.

Link: Our Reserve Studies