The Importance of Following Reserve Study Requirements (Oregon Law)

The Importance of Following Reserve Study Requirements (Oregon Law)

May 3rd, 2010

Author:  Ryan Harris
A well-maintained reserve fund is an important part of ensuring the financial health of an association. This is especially true as the association ages, and building components need to be replaced. Many association boards, unfortunately, discover that prior boards have not been vigilant in saving for future repairs, perhaps hoping that the day of reckoning would never come. As a result, the current board faces difficult choices about how to spend limited funds when extensive repairs are necessary. Often, when expensive maintenance or replacements is needed, the board has no choice but to levy a large, painful special assessment to make those repairs.

The best way around this problem is for the association to have adequate savings so that the association will not have to pick among pressing repairs, and will not be forced to levy a special assessment, potentially forcing owners into bankruptcy or foreclosure. Recognizing that too few associations were reserving for future expenses, the Oregon legislature passed a reserve fund requirement for both planned communities and condominiums. This article outlines some of the legal requirements those statutes place on associations.

Application of the Statute
Whether a condominium or a planned community, the statutory requirements for the reserve study are nearly identical. The first question an association must address is if the reserve study requirements actually apply to them. All associations created after October 23, 1999 must have a reserve study and a maintenance plan (ORS 94.595(5)(a); ORS 100.175(6)(a)). The difficult question of whether or not an association pre October 23, 1999 is required to have a reserve account is something an association should consult their lawyer about. However, all associations formed prior to October 23, 1999 that have a reserve fund can opt into the reserve study requirement. There are two ways to opt into the requirement: either the board of directors can pass a resolution opting-in or a majority of the owners can sign a petition requiring the association to opt-in (ORS 94.595(5)(a); ORS 100.175(6)(a)). The upshot of this analysis is that, while your association may not be required to have a reserve fund under the statute, the association should opt-in, or otherwise impose upon itself, the requirement. Running an association that maintains property without a maintenance plan is impractical and foolish.

Statutory Requirements.
The general idea behind the reserve study is to require an association to save a certain portion of the monthly assessment. This saving allows reserves to gradually accumulate over time in anticipation of big-ticket items the association must repair. To accomplish this goal, Oregon associations are required to establish a reserve account for association-maintained items that will require major maintenance, repair, or replacement in more than one, but less than thirty years (ORS 94.595; ORS 100.175). Unfortunately, the statute is vague as to the precise meaning of a “major maintenance, repair, or replacement” item. However, the statute does specifically say that the association must reserve for painting. A fair rule of thumb is that the association should reserve for any item that is more expensive than painting.

Actual Useful Life vs. Projected Useful Life
Oregon statutes require the association’s board to conduct or review and update the association’s reserve study yearly (ORS 94.595(3)(a); ORS 100.175(3)(a)). Again, the statute isn’t clear as to what constitutes a “review.” A review can probably be as minimal as pulling the reserve study off the shelf and reading it, or having a board member read it and report about it at a board meeting. What is clear, however, is that board needs to, once a year, consider whether the reserve study is being followed and whether it is accurate or needs updating. For example, suppose something has happened during the past year that has clearly shortened the useful life of building elements. The reserve study should reflect that event.

Just as clear is that the statute does not require the association to have a professional inspection of the commonly maintained property every year. Having a construction professional come to the building and assess the remaining useful life of all the building elements is a relatively involved, expensive process. While the association is not required to do this annually, it should still do it fairly frequently. A good rule of thumb would be to have an actual inspection every 3 to 5 years. If your association has just turned over, your association should do an inspection within the first several months. While your developer may have provided you with a reserve study, developers frequently underestimate repair costs and overestimate the useful lives of building components in order to keep assessment levels low. The board should not rely on a reserve study that was created by its developer, but should do its own due diligence.

Conclusion
In summary, far too many associations that do not have a reserve study (or simply do not follow it) soon discover that they must levy large special assessments in order to fulfill their repair and maintenance obligations. Your association does not have to be one of the unfortunate. Reserve studies are an important tool to associations that have maintenance responsibility for common elements, and should be taken seriously and followed for the future wellbeing of the association.