Similar to the national situation, underfunded reserves are a major concern for condominium associations in Washington State. One key reason for this problem is that condo boards may have an overly optimistic or uninformed view of the true cost of maintaining their community’s common areas.
Here’s a common misconception:
Many condo owners and board members reference Fannie Mae’s “10% of operating budget” rule as their reserve funding method.
While Fannie Mae does have requirements for condo associations to qualify for mortgages they underwrite, it’s important to understand the limitations of this 10% rule in Washington.
Why the 10% Rule Might Not Be Enough
Fannie Mae’s 10% is a minimum requirement, and it may not be enough to adequately fund reserves in Washington State. Here’s why:
- State Law: Washington law encourages, but doesn’t mandate, reserve accounts for common element maintenance and repair (https://app.leg.wa.gov/rcw/default.aspx?cite=64.34.380).
- Reserve Study: Most Washington condo associations are required to prepare a professional reserve study to determine their specific needs, not a one-size-fits-all approach (https://www.caionline.org/Advocacy/PublicPolicies/Pages/Community-Association-Budgets-and-Reserves.aspx). This study considers the unique features and age of your community’s assets.
The 10% rule might not account for the specific costs of maintaining your building’s roof, elevators, landscaping, or other features. For example a condominium association was painting the building and discovered wood rot around there decks which required rebuilding them. The association barely had enough money for paint but when they added in the repair costs of the decks they were going to have to do a special assessment. A reserve study requires a onsite inspection every 3rd year and decks are an area that does get inspected. Most likely if the association had a properly funded reserve they costs of the deck repairs would have been forecasted and no special assessment would have been needed.
