Is a Reserve Study Required for Our HOA?
The straightforward answer is yes, in the state of Washington, Homeowners Associations (HOAs) are generally required to conduct a reserve study and update it annually unless specific exemptions apply.
In the earlier versions of Washington’s Condominium Act, there was some ambiguity surrounding the requirement for a reserve study. Associations were not obligated to perform a reserve study if they could demonstrate a “financial hardship.” However, the law didn’t provide a clear definition of what constituted a financial hardship, leading to confusion among many associations. Some associations, considering the cost of reserve studies too high, declared themselves under financial hardship to avoid conducting one.
In 2011, Washington State legislators took steps to clarify the conditions under which an association could be exempt from conducting a reserve study.
Exemptions for Very Small Associations (with some caveats): Recognizing that many small condominiums and HOAs prefer to minimize paperwork and financial obligations, lawmakers introduced an exemption tailored to these situations. This exemption is applicable to associations created before July 1, 2018.
It states that if the cost of the reserve study exceeds five percent of the association’s annual budget, the association lacks significant assets, or there are ten or fewer homes in the association, the association may be exempt from certain reserve study requirements.
Associations established after July 1, 2018, have their own set of requirements. Small plat communities with no more than 12 units and annual assessments of no more than $300 per unit are exempt from many provisions of the Washington Uniform Common Interest Ownership Act. However, this exemption hinges on whether the declarant retains any rights to future alteration of the Common Interest Communities.
It’s important to note that, in practice, smaller associations often benefit greatly from reserve studies to plan for future expenses. Even if an association is exempt from some requirements, it doesn’t waive the necessity for all reserve-related obligations. The board should still establish a reserve funding plan, maintain a separate reserve fund savings account, and provide annual disclosures to members, including information on potential special assessments. Unfortunately, some smaller associations mistakenly believe they are exempt from all reserve requirements due to the exemption, which may not be in their best long-term interests.
For exempt associations, it is advisable to create their own reserve plan and ensure they are adequately funding it. If a significant expense looms on the horizon, the association should transparently inform its members about the anticipated costs and the timing of any assessments.
In conclusion, while some exemptions exist for very small associations in Washington State, the importance of prudent financial planning and transparent communication regarding reserve funds cannot be overstated. Associations should carefully evaluate their unique situations, seek professional guidance if necessary, and make informed decisions regarding their reserve study obligations and financial management practices.
