State laws and the governing documents for a homeowners association typically contain provisions that mandate the establishment and maintenance of a reserve fund for the accumulation of money that will be required in the future to repair, replace, restore, and/or maintain the various components that exist within the association which are part of the common area. Additionally, it is common for mortgage lenders to require HOA reserve studies and the maintenance of appropriate levels of reserves as a condition of financing the purchase of separate interests that are part of a homeowners association.
The proper maintenance of a reserve fund necessitates the periodic preparation of a reserve study, which consists of a detailed list of the different common area components that exist within the association accompanied by: (i) an indication of the cost to repair or replace each component; and (ii) an estimate of the remaining useful life of each component. Thus, the reserve study is a tool that the associations board of directors can rely on to determine how much money is needed to properly maintain all of the common area components, and when that money will be required for appropriate repairs and/or maintenance of the common areas.
After a reserve study has been completed, an associations board of directors should analyze the study in order to make decisions about how the associations reserve fund will be funded. Where is the money that is required to fund the reserves going to come from? Are the existing dues and assessments being paid by the associations members sufficient to properly maintain the reserve fund, or will it be necessary to increase the amount of the assessments being paid by the homeowners and/or impose a special assessment? These decisions that are made by the associations board of directors should then be disclosed annually to all of the homeowners when budgeting decisions are made and the associations financial information is provided to the members of the association. Some state statutes and/or association governing documents also impose minimum time periods for which the reserve study must be updated (i.e. every three years). Notwithstanding same, because conditions change from time-to-time, there is a need for periodic adjustments to the amounts allocated to the various components that are contained in the reserve study. Thus, association boards should be familiar with the requirements of their state statutes and their associations governing documents relative to the establishment and maintenance of a reserve fund.
The preparation of a proper reserve study necessitates a level of expertise that enables the preparer of the study to accurately: (i) identify all of the common area components; (ii) evaluate the condition of each component; (iii) determine the remaining useful life of each component; and (iv) accurately estimate the cost of repairs, maintenance, and replacement of each component. Because of the importance of reserve studies and the specialized expertise that is required for the proper preparation of a reserve study, an associations reserve study should always be prepared by an independent third-party retained by the association who specializes in the preparation of reserve studies. As with all other service providers, before retaining a particular person or company to provide a reserve study, a designated representative of the association should interview at least two or three different prospective reserve study companies before deciding on the company to use. While the cost of the reserve study is a significant consideration, it is also important to know such things as: (i) the level of the prospective providers experience in preparing reserve studies; (ii) what their credentials are; (iii) whether they follow National Reserve Study Standards; and (iv) what the final reserve study document that is delivered to the association will look like. Will it be in a clear and concise format that the individual directors can easily understand and make use of? Always request and evaluate a sample of a reserve study in the format that will be provided to your association from each of the different service providers that are being considered so they can be properly compared and evaluated. A copy of the National Reserve Study Standards for the preparation of reserve studies may be viewed via the below link.
The proper maintenance of a reserve fund is critical to the successful operations of all homeowners associations. Association boards and management personal should pay particular attention to the requirements of their state statutes and governing documents relative to reserve funds and strive to implement and maintain policies and procedures that ensure compliance with those requirements.
View copy of: National_Reserve_Study_Stand