Reserve funding, reserve studies and property infrastructure go hand-in-hand.
A Reserve Study amortizes funding expenses over time so that current owners are not unfairly burdened with the responsibility to pay for the maintenance, repair and replacement of components (regardless of cost) that have a useful life beyond one year. Why debate the fairness factor? If component XYZ needs to be maintained, repaired and/or replaced every 2 years to 100 years, plan for those components in your reserve study.
The legalese: what belongs in a reserve study? Start with your state statutes, but remember that there are certain guiding principles (see above) that make sense for every community. As an example three of our four Washington State CIC statutes dictate that reserve studies should or must (!) include components with a cost exceeding 1% of the association's annual budget:
A reserve component list, including any reserve component, the replacement cost of which exceeds one percent (1%) of the annual budget of the association, excluding contributions to the reserves for that reserve component. If one of these reserve components is not included in the reserve study, the study should/must explain the basis for its exclusion. The study must also include quantities and estimates for the useful life of each reserve component, the remaining useful life of each reserve component, and current major replacement costs for each reserve component ... AND MUCH MORE
In preparing a reserve study, the association shall estimate the anticipated major maintenance, repair, and replacement costs, whose infrequent and significant nature make them impractical to be included in an annual budget.
Have you transformed your reserve study into a living document?
Integrating comments about the current condition of reserve components (during your routine maintenance weekly, monthly, quarterly, annually, etc.) helps inform reserve study updates and transforms your reserve study into a truly living document with valuable context that's being evaluated more frequently than might otherwise be the case.
READ: The Prevention Plan
$$$ How can your CIC spend your reserve funds? $$$
Start with your state statutes. Three different Washington State CIC statutes provide the language below. Reserve funds are intended to be expended specifically for maintenance, repair and replacement activities, NOT for capital improvements (BUT you can often borrow from your reserve funds with a specified repayment schedule). Reserve studies do not contemplate capital improvements as part of their over-time funding and expense algorithms.
An association may withdraw funds from the association's reserve account to pay for unforeseen or unbudgeted costs that are unrelated to replacement costs of the reserve components. Any such withdrawal must be recorded in the minute books of the association. The board must give notice of any such withdrawal to each unit owner and adopt a repayment schedule not to exceed twenty-four months unless the board determines that repayment within twenty-four months would impose an unreasonable burden on the unit owners.
Payment for major maintenance, repair, or replacement of the reserve components out of cycle with the reserve study projections or not included in the reserve study may be made from the reserve account without meeting the notification or repayment requirements under this section.
The board may withdraw funds from the reserve account without satisfying the notification of repayment requirements under this section to pay for replacement costs of reserve components not included in the reserve study.
Reserve funds and any interest accruing thereon shall remain in the reserve account or accounts, and may be used only for authorized reserve expenditures unless their use for other purposes is approved in advance by a majority vote at a duly called meeting of the association...
Why would an association use reserve funds for items not contemplated in the reserve study?
to pay for sizeable capital improvements that will be depreciated over a period of several years
amortizing large expenses reduces the immediate cost burden
if a new asset is going to last 10, 20 or 30 years, it might make sense to pay for it over time
to fill a gap in operating funds (!)
to pay for maintenance, repair or replacement of a component that will be added to the reserve study
Do you have volunteers involved in your reserve study update process?
Volunteer participation is absolutely essential! In Washington State, reserve study vendors are statutorily indemnified from being held accountable for providing inaccurate information. CICs with volunteer involvement have consistently expressed more confidence in the information their reserve studies contain. 40% of CICs have volunteers who dedicate time annually to their reserve study updates. View the 2021 CIC Reserve Questionnaire.
Many nonsensical comments over the years contend that"reserve studies are just tools" as a way to justify woefully inaccurate data related to cost and useful life. Having to complete a project 5 years early or at 10% to over 1,000% more cost is material in many cases.
If your CIC's major component replacement costs $5MM instead of $3MM (or if you've excluded that component from your reserve calculations) most organizations don't have the additional $2MM capital available to make it work. Special assessments can be avoided by applying proper planning and additional effort from reasonable people looking at the data. It does not require a certification or degree or expertise in any specific field to make a measurable difference in your reserve study. View the difference below from 2013 to 2021.
VIEW Decision-Making 101
Impact of Volunteer Involvement on a Reserve Study
Is your CIC located in WA state? Please read this reserve study critical reminder.
TLDR: Several reserve study vendors are still not meeting the minimum requirements of RCW 64.90.525 that applies to ALL Washington State common interest communities (CICs) since July 2018. Over half the reserve studies analyzed by a Seattle law firm in 2021 were found to be substantially non-compliant with the statute. This deficiency jeopardizes your annual budget ratification process.
Predicting the future isn't easy, but this industry-standard reserve calculator with does most of the hard work for you!
CRITICAL QUESTIONS FOR EVERY RESERVE STUDY:
Are all your existing components identified and included? This requires understanding what your annual operating budget will resolve.
Are components with useful lives of 40 to 50+ years correctly calculated as part of the fully funded balance?
Are components properly categorized as CE vs. RLCE vs. CLCE, etc. as required by your governing documents?
Does every component reflect the correct useful life and remaining useful life?
Does every component reflect an accurate cost to maintain, repair or replace?
Have you applied sales tax to the cost of every component?
Are assumptions about component inflation costs and annual interest realistic?
N.B. This reserve calculator is not a replacement for hiring a reserve study vendor. | File > Save As > Download a Copy | Requires Excel 2016+
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