Reserve Study Washington: “The Top Six Components”

Feb 14, 2017 | Article

A reserve study is a budget and disclosure document, supplementing operating & maintenance budgets for the large expenses that don’t occur each year. In this busy world, focusing on a handful of key items in your reserve study may keep you out of costly trouble.

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A typical condominium Reserve Study in Washington has 30 to 50 components that meet the criteria for reserve funding, with their associated expenses occurring at varying intervals throughout the 30-year study period. Planning for this somewhat complicated array of expenses can much more easily begin by simply focusing on the “The Top Six” as they apply to your community. Put together a solid funding plan for these components and you’re likely to avoid special assessment and the myriad of problems that come with it.

Inflation is a key factor in reserve studies and having enough money to complete your projects on time and within budget. Construction is booming again around the Seattle area – a 1% change in inflation can result in a need to revise your contributions about 13%! Work with your provider to ensure your reserve studies are up to date so you have the information you need to be proactive and bring your project costs in at the best value.

Reserve Study Components, What are “The Top Six”?

While reserve studies address all common elements of an association, at minimum if you create a solid funding plan for the “Top Six”, you’re likely to avoid special assessments and the headaches that come with them:

  • Painting
  • Roofing
  • Asphalt
  • Siding
  • Windows
  • Decks

If your community in Washington is a mid or high-rise, you can substitute elevators and mechanical equipment for asphalt; in some cases, plumbing needs to be on that list as well. If you live in an HOA in Washington, your short list is different; likely to include fencing, playground and other recreation equipment, perhaps landscaping items, lighting, signage, a clubhouse, etc…

I took a random sampling of four recently completed condominium reserve studies in preparation for this article to determine just how significant the percentage of the total association assets these components are:

%

8 Units Tacoma Washington

%

12 Units in Seattle Washington

%

35 Units in Renton Washington

%

58 Units in Big Sky Montana

  • 8 units in Tacoma did not have decks
  • 35 units in Renton–the owners are responsible for windows
  • 12 units in Seattle had all of the top six components
  • 58 units in Big Sky Montana–I met a brown bear face to face on the road doing this one…

You can see most assets in these examples fall within the Big Six classification.

Planning for Reserves

It is difficult for many of us to look 20 to 30 years into the future as it relates to planning for our residence. An effective strategy is to begin your focus and discussion with the membership on the next 10 years. Typical ownership periods are often within that 10-year period and one or more of those top six expenses are likely to occur in that time frame. If your community is 11 to 20 years old, more than one is likely to occur. If it is 21 to 30+ years old, you may have to face many of these projects within that 10-year planning window.

Communities focusing on these items will illustrate most of near and mid-term cash flow needs without getting mired in the debate over whether or not the mailboxes should be in the Reserve Study, or why anyone in their right mind would plan for 30 years worth of projects…

Once you determine you community association’s needs,  then you can move on to addressing the other components in the study.

Strategies to Simplify the Process

  • Ignore these confusing terms within the Reserve Study (for now): Percent Funded, Fully Funded Balance, Full Funding, Threshold Funding and Baseline Funding.
  • Open the study to the 30-year income and expense detail, tear out the pages that show the next 10 years of income and expenses year by year and set the rest of the study aside as light reading for a later date.
  • To determine a starting point for a stable reserve contribution rate over that time period, review and sum the expenses projected over the next 10 years, divide by ten, then again by 12 if you are seeking a monthly reserve contribution rate.
  • Now ask yourself how much of a minimum balance in any given year you feel comfortable leaving the community with to guard against surprises, cost overruns, projects needing to be done sooner or at a larger scope than estimated.

You can view this minimum balance question as a percentage of expenses. For example, you might have a policy that states; the ending reserve balance in any given year should not be less than 25% of the projected expenses in that year. Or, you may consider a policy of not letting the reserve balance go below $50,000 or similar (I like the first of these two approaches better). Once you have your beginning point, discuss with the rest of the board, then the entire community, what years 11 thru 20 might bring your way and how it might affect your plan. Communicate and disclose should be your mantra for reserves planning.

Final Thoughts from a Reserve Study Professional

I am somewhat surprised by the number of associations who do not clearly understand their maintenance, repair and replacement responsibilities for the common and limited common elements of their community. Many times, they’re different than what the association believes they are. I strongly advise all associations that have not previously done so, engage a knowledgeable law firm to review their governing documents and draft an association Responsibility Matrix. This legal review and resulting responsibility matrix can be a critical component to the planning process.

Legislation was enacted into law in 2011 requiring the study to be disclosed to all owners during the budget process as well as the board’s funding plan in comparison to the reserve study recommendations to be disclosed and ratified by the membership.

The lessons I’ve learned during the last few years, particularly in my own planning, have resulted in a simplification of my thought process. Consider doing the same for your association and I think you will be on the path to a successful community. I wish you all the best for the time period of 2017 thru 2026, and beyond.


 

Jim Talaga, RS

Jim Talaga, RS

Author

Jim is president of Association Reserves Washington, LLC and he and his staff have performed over 7,500 Reserve Studies for clients throughout the Pacific Northwest since 1997. Association Reserves, Inc. is the nation’s largest Reserve Study provider.

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