State statutes and association governing documents require homeowners associations, regardless of size, to perform reserve studies and maintain appropriate levels of reserve funds. The purpose of such a rule requiring an HOA reserve study is to enable associations to have sufficient funds available as they are needed to repair, replace, restore, or maintain the major common area components that make up the associations common area. It is inevitable that sooner or later common area components are going to require repairs, replacement or restoration and if the funds that are necessary are not available when they are needed, the association is destined for future problems.
To facilitate having funds available in a reserve account when they are required, associations must conduct reserve studies and adopt a reserve funding plan. The process of conducting an HOA reserve study and adopting a reserve funding plan requires the following multiple steps:
The associations board of directors retains a reserve study company to inspect the associations common areas and identify the various common area components, the life span of each component and where each component is in that life span, and the cost to repair and replace each such component when necessary.
After preparing the information required relative to the associations common area components, the reserve company retained by the association performs a calculation relative to each component to determine how much money is needed and when.
After the amount that is required to properly fund reserves has been determined, the associations board of directors must decide on how to fund the reserves (a reserve funding plan). Generally, the reserves are funding through increased regular assessment contributions by the associations members, through special assessments levied on the members, or some combination of the two.
The reserve funding plan should be reviewed by the associations directors annually and disclosed to the associations members at the end of each year when financial and budgeting information is provided to the members.
Because the life span and condition of the common area components that is identified in the HOA reserve study and reserve funding plan is based on projections, association directors must review the reserve study annually to verify the actual condition of the common area components and make appropriate adjustments to the reserve funding plan to ensure that appropriate funds are being deposited to the associations reserve account. Some states, such as California, also mandate that at least once every three years, an associations board of directors cause a reasonably competent and diligent visual inspection of the accessible areas of the associations major common area components to be conducted to confirm the actual condition of such components and enable the associations directors to make appropriate adjustments to the funding plan.
While some associations rely on their board members, a manager, or the associations accountant to prepare an HOA reserve study, the best practice is to retain an independent third-party who specialize in the preparation of reserve studies in accordance with published National Reserve Study Standards. A copy of the published National Reserve Study Standards may be viewed via the below link.
See: National Reserve Study Standards