The reserve requirement plays a major role in ensuring financial stability for associations. Reserve funds pay for major repairs and replacements when components reach the end of their useful life. To know the best funding level, associations must conduct a reserve study.
What is the Reserve Requirement in Oregon?
A reserve fund is essentially a savings account that associations use to pay for future major repairs and replacements. Oregon reserve laws require both HOAs and condo associations to maintain reserves and conduct a reserve study.
The problem with reserve funds is that board members often don’t know how much they should set aside. To find out, an association must conduct a reserve study.
A reserve study is a detailed evaluation of all the major components that an association must maintain. A reserve study has two important parts: the physical analysis and the financial analysis.
Physical Analysis
This section lists the major common areas the association must repair or replace at some point. This can include roofs, siding, pavement, mechanical systems, fencing, lighting, and other shared assets.
A reserve study reviews the condition of these components and estimates their remaining useful life. As a result, a study can also reveal any assets or components that might need maintenance sooner than expected.
Financial Analysis
This part evaluates the association’s current reserve fund and estimates how much money the association must save. It includes projected replacement costs, inflation assumptions, and expected timelines.
Additionally, this part develops a funding plan. This plan helps boards determine how much it must collect in reserve contributions to meet a healthy funding balance.
Are Reserve Studies Required in Oregon?
Yes. Oregon’s reserve study law outlines specific duties for both homeowners associations and condominiums.
According to ORS 94.595, homeowners associations or planned communities must conduct a reserve study and maintain reserve funding. Similarly, ORS 100.175, which is for condominium associations, requires reserve studies and funding.
The Importance of Reserve Studies
Reserve studies are among the most valuable planning tools for any association. They help the board understand the community’s long-term needs. Without this study, the board might neglect deteriorating components and fail to save enough money to address them.
When an association doesn’t have enough reserves, the board may be forced to use other means to cover a large-scale expense. For example, if the clubhouse’s roof collapses, an association without reserve funding will have to levy special assessments, take out a loan, or increase regular dues significantly.
Many lenders and insurers also consider reserve funding essential. They often check whether an association has sufficient reserves and whether a study has been conducted. They do this because a community with a strong financial plan is a much safer bet than their counterparts.
Types of Reserve Studies
There are three common types of reserve studies that associations use: a full reserve study, an update with a site visit, and an update with no site visit. Let’s break them down below.
1. Full Reserve Study
A full reserve study is the most comprehensive option. This includes an on-site inspection and a complete review of the association’s major components.
It also provides detailed financial projections and updated timelines. This type is often used when the association has never had a study conducted. Many associations also need to conduct one every five or so years.
2. Update With Site Visit
An update with site visit uses the previous full study as a starting point. This involves re-inspecting the property and revising the study based on the findings.
The cost of this update lies between a full reserve study and one with no site visit. Boards can use this every few years to ensure accuracy.
3. Update With No Site Visit
An update without a site visit consists purely of financial updates. It uses the existing physical data to adjust cost estimates and funding levels. This is the most affordable type. Most boards use this type of study annually.
How Much Should an HOA Have in Reserves?
There is no single amount that fits every association. The optimal reserve balance will depend on several factors, including the community’s size, common elements, and age. This is why reserve studies are important, as they determine how much an association must have.
That said, it is best to aim for 70 percent funding. This means that the association should have at least 70 percent of its total required funding in reserves at any given time.
A Breakdown of Oregon Reserve Study Requirements
In Oregon, both HOAs and condo associations are required to fund reserves and conduct reserve studies. The statutory requirements are discussed below. That said, board members should also refer to their governing documents for additional guidance.
Reserve Study Requirements for HOAs
For HOAs operating under ORS Chapter 94:
- The declarant must conduct the initial reserve study, prepare the initial maintenance plan, and establish the reserve account under ORS 94.595.
- After turnover, the board must either conduct a reserve study or update the existing study each year.
- The board may adjust reserve contributions based on the study’s results without seeking owner approval.
- The board must include reserve funding in the annual budget under ORS 94.645.
- An HOA may choose not to fund reserves for one year, provided every owner agrees.
Reserve Study Requirements for Condominiums
For condominium associations under ORS Chapter 100:
- ORS 100.175 requires the declarant to conduct the initial reserve study and set up the reserve account.
- After the declarant’s control ends, the board must review or update the reserve study annually.
- The board may increase or modify contributions based on the study’s findings.
- ORS 100.483 requires the board to include reserve contributions in the annual budget.
- A condominium may skip funding for one year, provided all owners consent.
Who Conducts Reserve Studies?
Just because there is a reserve requirement doesn’t mean boards should take matters into their own hands. Reserve studies require a specialist, as they involve both financial and physical inspections. It is best to look for a reserve study professional or an HOA management company.
Essential to Associations
Both homeowners associations and condominiums must follow the reserve requirement as defined under state laws and their governing documents. Regular reserve studies help the board understand community needs and prepare for the future.
CWD Group helps community associations navigate the ins and outs of financial management, including reserve studies. Call us today at 503-488-2008 or contact us online to learn more!
