Reserve Accounts and Studies — New Law, Old Problem

Reserve Accounts and Studies — New Law, Old Problem

You can pay now or someone else will pay later. That used to be the law in Washington State. No longer.

Washington State Governor Christine Gregoire signed into law new legislation concerning owner associations and reserve studies. The law becomes effective January 1, 2012. A copy of the bill can be found here: 2011 Wash. Laws 189.

A reserve study is a financial planning tool that helps an association understand the estimated costs over the next thirty (30) years of replacing, repairing, and restoring significant infrastructure that is commonly owned or shared by its owners.

The law affects all residential property under the jurisdiction of a condominium association or a homeowners’ association:  Condominium Associations, RCW 64.32, RCW 64.34; Homeowners’ Associations, RCW 64.38.

Under this 2011 legislation, effective January 1, 2012, all residential condominium and homeowner association boards will be required to provide unit owners detailed information regarding current and future projected reserve account funding, reserve-related assessments, and contribution rates for fully funded plan. The “detailed information” is described under RCW 64.34.308(4) and RCW 64.38.025(4).

This is important. Residential owners in owner associations will have the right to receive annual disclosures about the short and long-term financial health of the association, about whether there’s enough money to maintain the property in the near future, about whether there’s projected to be enough money down the road to maintain the property, and the source of any ordinary or extraordinary funding during a thirty-year time-frame. An important omission from earlier legislation was the lack of an express requirement to distribute this information to owners on a regular basis.

Here’s what the legislation doesn’t do. Whether or not you believe it’s fair that owners should be required to pay for infrastructure as they “use it up”, there is still no mandatory requirement for funding reserve accounts. Not having mandatory funding for reserves creates a risk for owners as well as buyers who don’t read or understand financial statements.

From an historical perspective, lack of long-term financial planning, accompanied by abysmal ignorance on the part of associations and their owners about the true cost of ownership, has created a financial crisis for older properties. Ignoring financial planning allowed a bohemian culture where association competed against association in a race to the bottom for the lowest possible monthly assessment, regardless of the long-term consequence to the property or the owners.

The reserve study legislation has been championed by associations and owners who believe it’s time to stop inebriated ostrich financial planning. At a time when lenders, realtors, and owners are looking more closely at the financial health of associations, the associations who plan, fund, inform, and maintain the property will enjoy higher property values and won’t be faced with sudden large special assessments for foreseeable expenses.

Kudos to the team that championed this, and kudos to the State of Washington for passing enlightened legislation.

For further information on reserve studies, please contact a reputable reserve study professional like Association Reserves, Inc.

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