The State Laws That Impact The Solvency of HOAs in Washinghton and Oregon


Many homeowners improve the landscaping and entrances to their homes for enjoyment; but, this activity also creates curb appeal that adds value to their homes. Members of an HOA engage in this activity as well; but they also pay dues used to maintain their HOA's common areas; and they contribute to Reserve Funds that are used to maintain and/or replace infrastructure owned by the HOA, known as the HOA's "Reserve Components" that should be listed and described in the HOA's "Reserve Study."

The HOA's Board of Directors, or its agent, is responsible for managing an HOA's Reserve Fund; and if the contributions over time to this Fund are inadequate or are misused, the curb appeal of the HOA could easily decrease the value attached to the HOA and to value of homes in the HOA. As such, members should be keenly aware of the State laws that govern their HOAs, especially the sections which lowers the risk of an HOA's insolvency.

This article compares how the laws of Washington and Oregon require Boards of Directors for HOA's to address their HOAs' reserve funding and operating budgets and the degree to which members can exercise some control over their Boards regarding these issues.

The State of Washington currently has two laws that regulate HOAs: RCW64.90 for associations that were created as of July 1, 2018; and RCW64.38 for associations that were created prior to July 1st, 2018, unless members of these HOAs vote to become governed by RCW64.90.

RCW64.38- Laws of Washington

Beginning with RCW64.38 that governs most of the HOAs that were created in Washington prior to July 1, 2018, the creation and updates for an HOA's Reserve Study describes the physical condition of the HOA's infrastructure and the Maintenance Plan determines the scheduling for the repairs of this infrastructure (aka Reserve Components).The laws that govern how Boards influence the creation and maintenance of HOA's Reserve Components are described below.

RCW64.38.065 (Reserve Account and Study), subsection (2) states "Unless doing so would impose an unreasonable hardship, an association with significant assets shall prepare and update a reserve study, in accordance with the association's governing documents and this chapter. Subsection (3) states "Unless doing so would impose an unreasonable hardship, the association shall update the reserve study annually. At least every three years, an updated reserve study must be prepared, based upon a visual site inspection conducted by a reserve study professional. However, subsection (4)states, "The decisions relating to the preparation and updating of a reserve study must be made by the board of directors in the exercise of the reasonable discretion of the board.

(source:Attachment 1a)

RCW 64.38.070 (Reserve Study Requirements) states that the Reserve Study should address the maintenance, repair and replacement of infrastructure (aka Reserve Components) whose infrequent and significant nature make them impractical to be included in the annual budget. The study must include quantities and estimates for the useful life of each reserve component, remaining useful life of each reserve component, and current major maintenance, repair, or replacement cost for each reserve component; and this Study should include a projected reserve account balance for thirty years and a funding plan to pay for projected costs from that reserve account without reliance on future unplanned special assessments. (source Attachment 1.b)

RCW64.38.075(Withdrawls from Reserve Funds) states that an HOA's Board must notify the HOA's members immediately about the Board's disbursement from the HOA's Reserve Fund for an unbudgeted item that is not for the purpose of repairing a Reserve Component. This law also states that The Board must report the disbursement in the Minutes of the Board's Meeting and by hand-delivering or mailing each member a letter about the unbudgeted disbursement which could refer to a capital improvement which is not a repair.(source: Attachment 1.c)

RCW 64.38.080 Reserve study—Demand for preparation and inclusion in budget.(1) When more than three years have passed since the date of the last reserve study prepared by a reserve study professional, the owners to which at least thirty-five percent of the votes are allocated may demand, in writing, to the association that the cost of a reserve study be included in the next budget and that the study be prepared by the end of that budget year. An association may assert unreasonable hardship as an affirmative defense in any action brought against it under this section. Without limiting this affirmative defense, an unreasonable hardship exists where the cost of preparing a reserve study would exceed five percent of the association's annual budget. (source: Attachment 1.d)

RCW64.38.090- (Reserve Study—Exemptions).*** CHANGE IN 2019 *** (SEE 5334.SL) ***An association is not required to follow the reserve study requirements under RCW 64.38.025 and RCW 64.38.065 through 64.38.085 if the cost of the reserve study exceeds five percent of the association's annual budget, the association does not have significant assets, or there are ten or fewer homes in the association.

RCW64.38.025 (CHANGE IN 2019, Effective July 28, 2019) (Standard of care—Restrictions—Budget—Removal from Board). is clearly written in most places and should be useful for all HOAs created prior to July 1, 2018 because they may choose to replace the board or reject the proposed budget. There are not too many other other options available. Subsection (5) states that the owners by a majority vote of the voting power in the association present, in person or by proxy, and entitled to vote at any meeting of the owners at which a quorum is present, may remove any member of the board of directors with or without cause. (source:Attachment 1.e - RCW64.38.025 (Standard of care—Restrictions—Budget—Removal from Board) (Effective July 28, 2019)

One important assumption about RCW 64.38.025(1) is that the "Board of Directors shall act in all instances on behalf of the association. In the performance of their duties, the officers and members of the Board of Directors shall exercise the degree of care and loyalty required of an officer or director of a corporation organized under RCW24.03". However, other States, (e.g., Oregon) have concluded that in may cases problems have arisen that are usually the result of inexperience with this kind of ownership and the statutory provisions that govern their Boards). Therefore, members of HOAs should try to ensure that their Boards will satisfy the disclosure requirements of RCW64.38.025 stated in subsections 4.a through 4.g.during annual meetings because these disclosures are"Part of the Budget Approval Process".

Conclusion- If an HOA's Board has not chosen to prepare a Reserve Study and its updates, from which contribution rates to Reserve Funds must be determined in order to ensure that the balance in the Reserve Account will be available to fully fund the repairs of all of the Reserve Components for up to 30 years, then the Board has no rational basis upon which to recommend any contributions to a Reserve Fund. However, the Board may decide to propose Special Assessments that requires the presenting a formal plan to members in order to reveal the purpose(s) of the Assessment(s).

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RCW64.90 governs HOAs created as of July 1, 2018, and preexisitng HOAs if owners of 67 percent of the lots in the HOA vote to become governed by RCW64.90.

RCW64.90.545 (Reserve Study) states

(1) Unless exempt under subsection (2) of this section, an association must prepare and update a reserve study in accordance with this chapter. An initial reserve study must be prepared by a reserve study professional and based upon either a reserve study professional's visual site inspection of completed improvements or a review of plans and specifications of or for unbuilt improvements, or both when construction of some but not all of the improvements is complete. An updated reserve study must be prepared annually. An updated reserve study must be prepared at least every third year by a reserve study professional and based upon a visual site inspection conducted by the reserve study professional".

(2) Unless the governing documents require otherwise, subsection (1) of this section does not apply (a) to common interest communities containing units that are restricted in the declaration to nonresidential use, (b) to common interest communities that have only nominal reserve costs, or (c) when the cost of the reserve study or update exceeds ten percent of the association's annual budget.

(3) The governing documents may impose greater requirements on the board.Recall that RCW.64.38.090 removes the responsibility to prepare a Reserve study or update if the cost will exceed 5 percent of the annual budget; and RCW 64.38.065T

RCW64.90.550 (Reserve Study Contents) is the State of Washington's benchmark for considering whether an original and updated Reserve Study can be used to determine the HOA's contributions for Reserve Funding to cover repairs and capital improvements for a forward a period up to 30 years. RCW64.90.550 (3)states"A reserve study must also include the following disclosure:"This reserve study should be reviewed carefully. It may not include all common and limited common element components that will require major maintenance, repair, or replacement in future years, and may not include regular contributions to a reserve account for the cost of such maintenance, repair, or replacement. The failure to include a component in a reserve study, or to provide contributions to a reserve account for a component, may, under some circumstances, require the association to (a) defer major maintenance, repair, or replacement, (b) increase future reserve contributions, (c) borrow funds to pay for major maintenance, repair, or replacement, or (d) impose special assessments for the cost of major maintenance, repair, or replacement." (source:Attachment 2.a )

RCW64.90.540 (1) (Reserve Account—Withdrawals) states The board may withdraw funds from the association's reserve account to pay for unforeseen or unbudgeted costs that are unrelated to replacement costs of the reserve components. Any such withdrawal must be recorded in the minute books of the association. The board must give notice of any such withdrawal to each unit owner and adopt a repayment schedule not to exceed twenty-four months unless the board determines that repayment within twenty-four months would impose an unreasonable burden on the unit owners. The board must provide to unit owners along with the annual budget adopted in accordance with RCW 64.90.525 (a) notice of any such withdrawal, (b) a statement of the current deficiency in reserve funding expressed on a per unit basis, and (c) the repayment plan.

(2) The board may withdraw funds from the reserve account without satisfying the notification of repayment requirements under this section to pay for replacement costs of reserve components not included in the reserve study. RCW64.90.540 is nearly the same as RCW64.38.075 except that RCW64.90.540 delays notifications until the annual meeting and requires disclosure of a statement about the current deficiency in the Reserve Fund.
RCW 64.90.525 (Budgets—Assessments—Special Assessments).

Subsection(1)(a)states that if the owners of 51 percent of the lots do not reject the budget in person or by proxy after they have been mailed a copy of the proposed budget, the Board's proposed budget if adopted automatically.

Subsection (2) states that the Budget must include the following information: (a) The projected income to the association by category;(b) The projected common expenses and those specially allocated expenses that are subject to being budgeted, both by category;(c) The amount of the assessments per unit and the date the assessments are due;(d) The current amount of regular assessments budgeted for contribution to the reserve account;(e) A statement of whether the association has a reserve study that meets the requirements of RCW 64.90.550 and, if so, the extent to which the budget meets or deviates from the recommendations of that reserve study; (f) The estimated amount recommended in the reserve account based upon the most recent reserve study at the end of each of the next five budget years, the projected reserve account cash balance in each of those years, and the projected percent funded for each of those years; and subsection 4(b)states that " If additional regular or special assessments are scheduled to be imposed, the date the assessments are due, the amount of the assessments per each owner per month or year, and the purpose of the assessments"; and (4.g) states" If the funding plan approved by the association is implemented, the projected reserve account cash balance in each of the next five budget years and the percent funded for each of those years. (3) The board, at any time, may propose a special assessment. The assessment is effective only if the board follows the procedures for ratification of a budget described in subsection (1),

RCW64.90.555 (Reserve Study—Demand—Enforcement) states(1) "When more than three years have passed since the date of the last reserve study prepared by a reserve study professional, unit owners of units to which at least twenty percent of the votes in the association are allocated may demand in a record delivered to the Board that the cost of a reserve study should be included in the next annual budget and that the study must be prepared by the end of that budget year. Subsection (2) states if the updated study is not prepared "One or more unit owners may bring an action to enforce the requirements of this section and RCW 64.90.545 and 64.90.550". If such an action is taken, a court may order specific performance and may award reasonable attorneys' fees and costs to the prevailing party". (Recall that RCW64.38 requires a vote of 35 percent to demand that the Board update a Reserve Study).

RCW 64.90.520 (Officers and board members—Removal).

(1) Unit owners present in person, by proxy, or by absentee ballot at any meeting of the unit owners at which a quorum is present may remove any board member and any officer elected by the unit owners, with or without cause, if the number of votes in favor of removal cast by unit owners entitled to vote for election of the board member or officer proposed to be removed is at least the lesser of (a) a majority of the votes in the association held by such unit owners or (b) two-thirds of the votes cast by such unit owners at the meeting, but:

(2) At any meeting at which a vote to remove a board member or officer is to be taken, the board member or officer being considered for removal must have a reasonable opportunity to speak before the vote.

(3) At any meeting at which a board member or officer is removed, the unit owners entitled to vote by RCW64.90 can make it slightly more difficult for a Board to ignore the members for the board member or officer may immediately elect a successor board member or officer consistent with this chapter.(source:Attachment 2.c).

Conclusions- The Boards that are governed by RCW64.90 may find it somewhat more difficult to ignore members' demands for the preparation and/or third year updates of the HOA's Reserve Study. However, if Boards find it necessary to increase the contributions for repairs of Reserve Components that will require levying special assessments, which the 30-year required funding plan for the Reserve fund is supposed to be designed to prevent, at least members governed by RCW64.90 have more control over the removal of Directors from the Board than REC64.38 provides.

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Oregon's Laws that Govern HOAs

"In 1981, the Oregon Legislature concluded that "Many of these homeowners associations as associations and their members as individuals have experienced problems from the lack of statutory provisions. These problems which have arisen are usually the result of inexperience with this kind of ownership. This inexperience often leads to difficulties for the association when it assumes responsibility for the administration of the planned development because usually neither the developer who drafted the documents nor the local jurisdiction which may have reviewed them has realized the long term management implications of the restrictions imposed by the documents...."(source: (ORS94.560 Legislative Findings)

Today, there is no longer a lack of statutory provisions that govern Oregons' HOAs. The current (2017) version of ORS 94.595 (Reserve account for maintaining, repairing and replacing common property• reserve study• maintenance) clearly identifies the activities that the declarant (i.e., developer) must perform prior to the Transition date at which time the developer turns over the responsibilities to the HOA's members who elect their Board of Directors who are responsible for updating the Reserve Study.

ORS94.595(1) states "The declarant, on behalf of a homeowners association, shall:(a)Conduct an initial reserve study as described in subsection (3) of this section;(b)Prepare an initial maintenance plan as described in subsection (4) of this section; and(c)Establish a reserve account as provided in subsection.

ORS94.595(2.a) states" A homeowners association shall establish a reserve account to fund major maintenance, repair or replacement of all items of common property which will normally require major maintenance, repair or replacement, in whole or in part, in more than one and less than 30 years...." except for repairs can be reasonably covered by the annual budget or for repairs if owners are responsible for maintenance and replacement under the provisions of the declaration or bylaws.that members . Subsection(2.c) states that the declararat shall determine the initial assessment for the based on:(A)The reserve study described in subsection (3) of this section; or(B)Other reliable information.

ORS94.595(3) assigns the responsibility to prepare an annual update of the Reserve Study squarely on the shoulders of the HOA's Board which includes determining the the reserve account's funding requirements for based on the the following information:(A)The starting balance of the reserve account for the current fiscal year;(B)The estimated remaining useful life of each item for which reserves are or will be established, as of the date of the study or review;(C)The estimated cost of maintenance and repair and replacement at the end of the useful life of each item for which reserves are or will be established;...and After the Board has completed its analysis, the Board of Directors may, without any action by owners:(A)Adjust the amount of payments as indicated by the study or update; and(B)Provide for other reserve items that the board of directors, in its discretion, may deem appropriate.

Subsection (3.C)states that "reserve study" shall:

(A)Identify all items for which reserves are or will be established;

(B)Include the estimated remaining useful life of each item, as of the date of the reserve study; and

(C)Include for each item, as applicable, an estimated cost of maintenance and repair and replacement at the end of the item’s useful life.

Subsection (4) states that "the maintenance plan shall:

(A)Describe the maintenance, repair and replacement to be conducted;

(B)Include a schedule for the maintenance, repair and replacement;

(C)Be appropriate for the size and complexity of the maintenance, repair and replacement responsibility of the association; and

(D)Address issues that include but are not limited to warranties and the useful life of the items for which the association has maintenance, repair and replacement responsibility.

Subsection(4.a) states that "The maintenance plan shall:(A)Describe the maintenance, repair and replacement to be conducted;(B)Include a schedule for the maintenance, repair and replacement;(C)Be appropriate for the size and complexity of the maintenance, repair and replacement responsibility of the association; and(D)Address issues that include but are not limited to warranties and the useful life of the items for which the association has maintenance, repair and replacement responsibility.

ORS94.595(6)(a) Except as provided in paragraph (b) of this subsection, the reserve account may be used only for the purposes for which reserves have been established and is to be kept separate from other funds. Subsection (6.b) states "After the individual lot owners have assumed responsibility for administration of the planned community under ORS 94.616 (Turnover meeting), if the board of directors has adopted a resolution, which may be an annual continuing resolution, authorizing the borrowing of funds:(A)The board of directors may borrow funds from the reserve account to meet high seasonal demands on the regular operating funds or to meet unexpected increases in expenses. (B)Not later than the adoption of the budget for the following year, the board of directors shall adopt by resolution a written payment plan providing for repayment of the borrowed funds within a reasonable period.

ORS94.520 (Officers and Board Members- Removal ).

(1) Unit owners present in person, by proxy, or by absentee ballot at any meeting of the unit owners at which a quorum is present may remove any board member and any officer elected by the unit owners, with or without cause, if the number of votes in favor of removal cast by unit owners entitled to vote for election of the board member or officer proposed to be removed is at least the lesser of (a) a majority of the votes in the association held by such unit owners or (b) two-thirds of the votes cast by such unit owners at the meeting, but:

(i) A board member appointed by the declarant may not be removed by a unit owner vote during any period of declarant control;

(ii) A board member appointed under RCW 64.90.420(3) may be removed only by the person that appointed that member; and

(iii) The unit owners may not consider whether to remove a board member or officer at a meeting of the unit owners unless that subject was listed in the notice of the meeting.

(2) At any meeting at which a vote to remove a board member or officer is to be taken, the board member or officer being considered for removal must have a reasonable opportunity to speak before the vote.

(3) At any meeting at which a board member or officer is removed, the unit owners entitled to vote for the board member or officer may immediately elect a successor board member or officer consistent with this chapter.

(4) The board may, without a unit owner vote, remove from the board a board member or officer elected by the unit owners if (a) the board member or officer is delinquent in the payment of assessments more than sixty days and (b) the board member or officer has not cured the delinquency within thirty days after receiving notice of the board's intent to remove the board member or officer. Unless provided otherwise by the governing documents, the board may remove an officer elected by the board at any time, with or without cause. The removal must be recorded in the minutes of the next board meeting.

ORS94.645 - (Adoption of the Budget)

(1) The board of directors at least annually shall adopt a budget for the planned community.

(2) The budget shall include moneys to be allocated to the reserve account under ORS 94.595 (Reserve account for maintaining, repairing and replacing common property).

(3) Within 30 days after adopting the annual budget for the planned community, the board of directors shall provide a summary of the budget to all owners.

(4) If the board fails to adopt a budget, the last adopted annual budget shall continue in effect. [1981 c.782 §39; 1999 c.677 §16; 2007 c.409 §8a]

ORS94.640-(Powers and Duties of Board- Removal of Director) states

(6)(a) Removal of Board of Directors - Unless otherwise provided in the declaration or bylaws, at a meeting of the owners at which a quorum is present, the owners may remove a director from the board of directors, other than directors appointed by the declarant or individuals who are ex-officio directors, with or without cause, by a majority vote of owners who are present and entitled to vote.

(b)Notwithstanding contrary provisions in the declaration or bylaws:

(A)Before a vote to remove a director, owners must give the director whose removal has been proposed an opportunity to be heard at the meeting.

(B)The owners must vote on the removal of each director whose removal is proposed as a separate question.

(C)Removal of a director by owners is effective only if the matter of removal was an item on the agenda and was stated in the notice of the meeting if notice is required under ORS 94.650 (Meetings of lot owners).

(c)A director who is removed by the owners remains a director until a successor is elected by the owners or the vacancy is filled as provided in subsection (7) of this section.

(7)Unless the declaration or bylaws specifically prescribe a different procedure for filling a vacancy created by the removal of a director by owners, the owners shall fill a vacancy created by the removal of a director by the owners at a meeting of owners. The notice of the meeting must state that filling a vacancy is an item on the agenda.

Conclusions - Oregon has placed the responsibility directly on the Boards to ensure that the Reserve Studies and updated Studies will be prepared so that the board can create a funding plan that will be able to preserve HOA's infrastructure. However, these laws do not actually remove the possibility that the elected Boards will have the experience that will prevent insolvency due to the long-range planning required to create a 30-year Funding Plan. Also, the members' ability to remove an inexperienced Director from the Board may be more limited than ORS64.94.640 suggests because this law only governs the removal of a Director if nothing in the HOA's governing documents addresses this issue.

Recommendations- Over time, members of HOAs may find that it costs less in the long run to prequalify the directors who they elect for their Boards because depending on which laws prevail in Washington and Oregon, an experienced Board with one or more directors who understand that preparing and updating a Reserve Study is needed in order to prepare a Reserve Fund for a 30-year forward period will be in the best interests of the members because these activities could avoid repetitious repairs that cost more than the capital improvements.

Alternatively, State laws could require that the developer or association must prepare the original Reserve Study and Maintenance Plan, and that periodic updates of both the Study and Plan must be prepared by a professional reserve specialist prior to the HOA's adoption of any special assessments for the purpose of making repairs or capital improvements that should be formally incorporated into the updated Reserve Study and updated Maintenance Plan.

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ATTACHMENTS

Attachment 1.a - RCW64.38.065 (Reserve Account and Study)

Attachment 1.b - RCW64.38.070 (Reserve Study Requirements)

Attachment 1.c- RCW64.38.075 (Reserve Account Withdrawls)

Attachment 1.d - RCW 64.38.080 (Reserve study—Demand for Preparation and Inclusion in Budget).

Attachment 1.e - RCW64.38.025 (Board of Directors—Standard of Care—Restrictions—Budget—Removal from Board).

Attachment 2.a - RCW64.90.550 (Reserve Study Contents)

Attachment 2.b - RCW64.90.525 (Budgets—Assessments—Special Assessments)

Attachment 2,c - 5 RCW 64.90.520 (Officers and Board Members—Removal).

Attachment 3.a- ORS94.595( Reserve Account for Maintaining, Repairing and Replacing Common Property)

Attachment 3.b- ORS 94.645 (Adoption of Annual Budget)

Attachment 3.c - ORS94.640 (Association Directors -Removal)

Attachment 1.a - RCW64.38.065 (Reserve account and study- becomes law on July 28, 2019).*** CHANGE IN 2019 *** (SEE 5334.SL) ***(1) An association is encouraged to establish a reserve account with a financial institution to fund major maintenance, repair, and replacement of common elements, including limited common elements that will require major maintenance, repair, or replacement within thirty years. If the association establishes a reserve account, the account must be in the name of the association. The board of directors is responsible for administering the reserve account.(2) Unless doing so would impose an unreasonable hardship, an association with significant assets shall prepare and update a reserve study, in accordance with the association's governing documents and this chapter. The initial reserve study must be based upon a visual site inspection conducted by a reserve study professional.(3) Unless doing so would impose an unreasonable hardship, the association shall update the reserve study annually. At least every three years, an updated reserve study must be prepared and based upon a visual site inspection conducted by a reserve study professional.(4) The decisions relating to the preparation and updating of a reserve study must be made by the board of directors in the exercise of the reasonable discretion of the board. The decisions must include whether a reserve study will be prepared or updated, and whether the assistance of a reserve study professional will be utilized.

Attachment 1.b - (RCW 64.38.070 Reserve study—Requirements).

(1) A reserve as described in RCW 64.38.065 is supplemental to the association's operating and maintenance budget. In preparing a reserve study, the association shall estimate the anticipated major maintenance, repair, and replacement costs, whose infrequent and significant nature make them impractical to be included in an annual budget.

(2) A reserve study must include:

(a) A reserve component list, including any reserve component that would cost more than one percent of the annual budget of the association, not including the reserve account, for major maintenance, repair, or replacement. If one of these reserve components is not included in the reserve study, the study should provide commentary explaining the basis for its exclusion. The study must also include quantities and estimates for the useful life of each reserve component, remaining useful life of each reserve component, and current major maintenance, repair, or replacement cost for each reserve component;

(b) The date of the study, and a statement that the study meets the requirements of this section;

(c) The following level of reserve study performed:

(i) Level I: Full reserve study funding analysis and plan;

(ii) Level II: Update with visual site inspection; or

(iii) Level III: Update with no visual site inspection;

(d) The association's reserve account balance;

(e) The percentage of the fully funded balance that the reserve account is funded;

(f) Special assessments already implemented or planned;

(g) Interest and inflation assumptions;

(h) Current reserve account contribution rates for a full funding plan and baseline funding plan;

(i) A recommended reserve account contribution rate, a contribution rate for a full funding plan to achieve one hundred percent fully funded reserves by the end of the thirty-year study period, a baseline funding plan to maintain the reserve balance above zero throughout the thirty-year study period without special assessments, and a contribution rate recommended by the reserve study professional;

(j) A projected reserve account balance for thirty years and a funding plan to pay for projected costs from that reserve account balance without reliance on future unplanned special assessments; and

(k) A statement on whether the reserve study was prepared with the assistance of a reserve study professional.

(3) A reserve study must also include the following disclosure: "This reserve study should be reviewed carefully. It may not include all common and limited common element components that will require major maintenance, repair, or replacement in future years, and may not include regular contributions to a reserve account for the cost of such maintenance, repair, or replacement. The failure to include a component in a reserve study, or to provide contributions to a reserve account for a component, may, under some circumstances, require you to pay on demand as a special assessment your share of common expenses for the cost of major maintenance, repair, or replacement of a reserve component.

Attachment 1.c-(RCW64.38.075 (Reserve Account Withdrawls)

An association may withdraw funds from its reserve account to pay for unforeseen or unbudgeted costs that are unrelated to maintenance, repair, or replacement of the reserve components. The board of directors shall record any such withdrawal in the minute books of the association, cause notice of any such withdrawal to be hand delivered or sent prepaid by first-class United States mail to the mailing address of each owner or to any other mailing address designated in writing by the owner, and adopt a repayment schedule not to exceed twenty-four months unless it determines that repayment within twenty-four months would impose an unreasonable burden on the owners".

Attachment 1.d - RCW64.38.080 - (Reserve study—Demand for Preparation and Inclusion in Budget).(1) When more than three years have passed since the date of the last reserve study prepared by a reserve study professional, the owners to which at least thirty-five percent of the votes are allocated may demand, in writing, to the association that the cost of a reserve study be included in the next budget and that the study be prepared by the end of that budget year. The written demand must refer to this section. The board of directors shall, upon receipt of the written demand, provide the owners who make the demand reasonable assurance that the board will include a reserve study in the next budget and, if the budget is not rejected by a majority of the owners, will arrange for the completion of a reserve study.(2) If a written demand under this section is made and a reserve study is not timely prepared, a court may order specific performance and award reasonable attorneys' fees to the prevailing party in any legal action brought to enforce this section. An association may assert unreasonable hardship as an affirmative defense in any action brought against it under this section. Without limiting this affirmative defense, an unreasonable hardship exists where the cost of preparing a reserve study would exceed five percent of the association's annual budget.(3) An owner's duty to pay for common expenses is not excused because of the association's failure to comply with this section or this chapter. A budget ratified by the owners is not invalidated because of the association's failure to comply with this section or this chapter.
Attachment 1.e - (RCW64.38.025 - Board of directors—Standard of care—Restrictions—Budget—Removal from Board).

*** CHANGE IN 2019 *** (SEE 5334.SL) ***

(1) Except as provided in the association's governing documents or this chapter, the board of directors shall act in all instances on behalf of the association. In the performance of their duties, the officers and members of the board of directors shall exercise the degree of care and loyalty required of an officer or director of a corporation organized under chapter 24.03 RCW.

(2) The board of directors shall not act on behalf of the association to amend the articles of incorporation, to take any action that requires the vote or approval of the owners, to terminate the association, to elect members of the board of directors, or to determine the qualifications, powers, and duties, or terms of office of members of the board of directors; but the board of directors may fill vacancies in its membership of the unexpired portion of any term.

(3) Within thirty days after adoption by the board of directors of any proposed regular or special budget of the association, the board shall set a date for a meeting of the owners to consider ratification of the budget not less than fourteen nor more than sixty days after mailing of the summary. Unless at that meeting the owners of a majority of the votes in the association are allocated or any larger percentage specified in the governing documents reject the budget, in person or by proxy, the budget is ratified, whether or not a quorum is present. In the event the proposed budget is rejected or the required notice is not given, the periodic budget last ratified by the owners shall be continued until such time as the owners ratify a subsequent budget proposed by the board of directors.

(4) As part of the summary of the budget provided to all owners, the board of directors shall disclose to the owners:

(a) The current amount of regular assessments budgeted for contribution to the reserve account, the recommended contribution rate from the reserve study, and the funding plan upon which the recommended contribution rate is based;

(b) If additional regular or special assessments are scheduled to be imposed, the date the assessments are due, the amount of the assessments per each owner per month or year, and the purpose of the assessments;

(c) Based upon the most recent reserve study and other information, whether currently projected reserve account balances will be sufficient at the end of each year to meet the association's obligation for major maintenance, repair, or replacement of reserve components during the next thirty years;

(d) If reserve account balances are not sufficient, what additional assessments may be necessary to ensure that sufficient reserve account funds will be available each year during the next thirty years, the approximate dates assessments may be due, and the amount of the assessments per owner per month or year;

(e) The estimated amount recommended in the reserve account at the end of the current fiscal year based on the most recent reserve study, the projected reserve account cash balance at the end of the current fiscal year, and the percent funded at the date of the latest reserve study;

(f) The estimated amount recommended in the reserve account based upon the most recent reserve study at the end of each of the next five budget years, the projected reserve account cash balance in each of those years, and the projected percent funded for each of those years; and

(g) If the funding plan approved by the association is implemented, the projected reserve account cash balance in each of the next five budget years and the percent funded for each of those years.

(5) The owners by a majority vote of the voting power in the association present, in person or by proxy, and entitled to vote at any meeting of the owners at which a quorum is present, may remove any member of the board of directors with or without cause.

Subsection 4(b) requires disclosure if additional regular or special assessments are scheduled to be imposed, the date the assessments are due, the amount of the assessments per each owner per month or year, and the purpose of the assessments.

Subsections (c) through (f) would be impossible for a board to disclose to members without some assistance from a reserve specialist, especially if the Board managed to disburse unbudgeted funds from a Reserve Fund that improved, rather than repaired the originally designed Reserve Components because doing so without disclosure to members when the disbursement was made would violate RCW64.38.075

Attachment (2.a) - RCW64.90.550 (Reserve Study Contents)

1) Any reserve study is supplemental to the association's operating and maintenance budget.

(2) A reserve study must include:

(a) A reserve component list, including any reserve component, the replacement cost of which exceeds one percent of the annual budget of the association, excluding contributions to the reserves for that reserve component. If one of these reserve components is not included in the reserve study, the study must explain the basis for its exclusion. The study must also include quantities and estimates for the useful life of each reserve component, the remaining useful life of each reserve component, and current major replacement costs for each reserve component;

(b) The date of the study and a disclosure as to whether the study meets the requirements of this section;

(c) The following level of reserve study performed:

(i) Level I: Full reserve study funding analysis and plan;

(ii) Level II: Update with visual site inspection; or

(iii) Level III: Update with no visual site inspection;

(d) The association's reserve account balance;

(e) The percentage of the fully funded balance to which the reserve account is funded;

(f) Special assessments already implemented or planned;

(g) Interest and inflation assumptions;

(h) Current reserve account contribution rates for a full funding plan and a baseline funding plan;

(i) A recommended reserve account contribution rate for a full funding plan to achieve one hundred percent fully funded reserves by the end of the thirty-year study period, a recommended reserve account contribution rate for a baseline funding plan to maintain the reserve account balance above zero throughout the thirty-year study period without special assessments, and a reserve account contribution rate recommended by the reserve study professional;

(j) A projected reserve account balance for thirty years based on each funding plan presented in the reserve study;

(k) A disclosure on whether the reserve study was prepared with the assistance of a reserve study professional, and whether the reserve study professional was independent; and

(l) A statement of the amount of any current deficit or surplus in reserve funding expressed on a dollars per unit basis. The amount is calculated by subtracting the association's reserve account balance as of the date of the study from the fully funded balance, and then multiplying the result by the fraction or percentage of the common expenses of the association allocable to each unit; except that if the fraction or percentage of the common expenses of the association allocable vary by unit, the association must calculate any current deficit or surplus in a manner that reflects the variation.

(3) A reserve study must also include the following disclosure:

"This reserve study should be reviewed carefully. It may not include all common and limited common element components that will require major maintenance, repair, or replacement in future years, and may not include regular contributions to a reserve account for the cost of such maintenance, repair, or replacement. The failure to include a component in a reserve study, or to provide contributions to a reserve account for a component, may, under some circumstances, require the association to (1) defer major maintenance, repair, or replacement, (2) increase future reserve contributions, (3) borrow funds to pay for major maintenance, repair, or replacement, or (4) impose special assessments for the cost of major maintenance, repair, or replacement."

RCW 64.90.525(2.b) - (Budgets—Assessments—Special assessments).

(1)(a) Within thirty days after adoption of any proposed budget for the common interest community, the board must provide a copy of the budget to all the unit owners and set a date for a meeting of the unit owners to consider ratification of the budget not less than fourteen nor more than fifty days after providing the budget. Unless at that meeting the unit owners of units to which a majority of the votes in the association are allocated or any larger percentage specified in the declaration reject the budget, the budget and the assessments against the units included in the budget are ratified, whether or not a quorum is present.

(b) If the proposed budget is rejected or the required notice is not given, the periodic budget last ratified by the unit owners continues until the unit owners ratify a subsequent budget proposed by the board.

(2) The budget must include:

(a) The projected income to the association by category;

(b) The projected common expenses and those specially allocated expenses that are subject to being budgeted, both by category;

(c) The amount of the assessments per unit and the date the assessments are due;

(d) The current amount of regular assessments budgeted for contribution to the reserve account;

(e) A statement of whether the association has a reserve study that meets the requirements of RCW 64.90.550 and, if so, the extent to which the budget meets or deviates from the recommendations of that reserve study; and

(f) The current deficiency or surplus in reserve funding expressed on a per unit basis.

(3) The board, at any time, may propose a special assessment. The assessment is effective only if the board follows the procedures for ratification of a budget described in subsection (1) of this section and the unit owners do not reject the proposed assessment. The board may provide that the special assessment may be due and payable in installments over any period it determines and may provide a discount for early payment.

Attachment (2.b) - RCW 64.90.520 (Officers and board members—Removal).

(1) Unit owners present in person, by proxy, or by absentee ballot at any meeting of the unit owners at which a quorum is present may remove any board member and any officer elected by the unit owners, with or without cause, if the number of votes in favor of removal cast by unit owners entitled to vote fo