Reserve Studies for Condominiums & Homeowner’s Associations

The majority of states do not regulate reserve studies or the reserve study business. A small number of states do require certain types of common interest realty associations (CIRA’s) to prepare a reserve study as part of their governance responsibilities, and in the case of Florida, state law requires associations to include reserve funding for specific items in their annual budget; but does not specifically require an association to conduct a formal reserve study to determine the appropriate level of reserve funding.

Regardless of whether you live in a state which requires your association to conduct a reserve study it is all but mandatory for most types of CIRA’s to prepare a study as most mortgage lenders now require condominiums and other forms of attached housing communities to provide a current reserve study in order obtain mortgage financing.

The department of Housing and Urban Development (HUD) and the Federal National Mortgage Association have recently tightened their underwriting guidelines with respect to reserve funding requirements. As the real estate market begins to correct itself and home sales begin to rise it will be increasingly difficult to obtain mortgage financing on condominiums and attached homes if your association does not have a professionally prepared reserve funding plan in place.

Please click on the state where your community is located to learn more about reserve study requirements and services available from Capital Reserve Consultants in your area.

Arizona:

Condominiums in the State of Arizona are governed by Chapter 9 of the Arizona Revised Statutes (ARS). There is no statutory requirement to prepare a reserve study or to fund a reserve account. Article 33-1260(d) does require disclosure to prospective buyers of any amounts currently being held as reserves by the association. Article 33-1258(a) also requires the association to make a reserve study available for examination by any member or person designated by the member in writing, as the member’s representative; should one exist.

Many condominiums and homeowner’s associations within the State do however, conduct reserve studies, in particular those which are managed by professional community management companies.

CRC serves the Arizona market from its Oregon location and will be opening an office in the State in late 2009 or early 2013. For more information about obtaining a reserve study for your association please contact Carson M. Horton, RS at: 503-336-3719.

Colorado:

Colorado law does not require condominium or homeowner’s associations to perform a reserve study or to include a provision for reserve funding in the annual budget.

Florida:

Condominiums in the State of Florida are governed by Chapter 718 of the Florida Statutes (FS). Homeowners associations are governed by Chapter 720; timeshare and fractional ownership resort developments are governed by Chapter 721. FS 718.112(f) [2] requires condominium associations to fund a reserve account for certain capital expenditures and deferred maintenance. The statute requires all condominium associations to maintain reserves for roof replacement, building painting, pavement resurfacing and any other expense which is expected to exceed $10,000.00.

The statute does not specifically require that a reserve study be conducted to determine the level of funding required. However, the statute does require that the reserve contribution be computed using a formula which is based upon the estimated remaining useful life (EUL) and the estimated replacement cost or deferred maintenance expense for the component; in effect a reserve study. What this suggests is that it is not adequate to simply allocate an arbitrary sum of money to the Roof Replacement Fund in the association annual budget and call it good. Instead, the amount being allocated must be based on a realistic calculation which accounts for the current condition and remaining life expectancy of the component.

FS 718.112(f) [3] regulates the use of funds which are collected as reserves, limiting the use of such funds to authorized reserve fund expenditures unless their use for other purposes is approved, in advance, by a majority vote of a duly called meeting of the association.

In 2008 the FS 718 was revised to require all condominium association’s containing buildings over 3 stories tall to be inspected by a licensed architect or engineer at least once every 5 years FS 718.113(6); and within 5 years of October 1, 2008. The architect or engineer must provide a written report, under seal, attesting to the required maintenance, useful life and replacement costs of the common elements.

By a majority of the voting interests present at a duly called meeting of the association, an association may wave the inspection requirement. Any such waiver must occur before the end of the 5 year period and is only good for the 5 year period in question; hence the association would again need to waive the requirement every 5 years by a majority vote.

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Georgia:

Georgia law does not require condominium or homeowners associations to perform a reserve study or to include a provision for reserve funding in the annual budget.

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Idaho:

Idaho law does not require condominium or homeowners associations to perform a reserve study or to include a provision for reserve funding in the annual budget.

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Illinois:

The Illinois Condominium Property Act [605/9 (c) (2)] requires all budgets for condominiums adopted after July1, 1990 to provide for “reasonable reserves for capital expenditures and deferred maintenance for repair or replacement of the common elements”. The term reasonable is not clearly defined, leaving it up to interpretation as to what constitutes a reasonable level of reserve funding.

The Illinois Condominium Property Act [605/9 (c) (3)] allows an association to waive in whole or in part the reserve requirements of the Act by a 2/3 majority vote of the association. Any association which has elected to waive the reserve funding requirements may again elect to be governed by [605/9 (c) (2)] by the same 2/3 majority approval.

Paragraph (4) of subsection (c) requires any association which has chosen to waive the requirements to maintain reasonable reserves to disclose this fact subsequent to the meeting at which the waiver is approved by the aforementioned 2/3 majority vote. The disclosure must be made in the association’s financial statements, and must be highlighted in bold print in response to any request by a prospective purchaser for the disclosure information required under Section 22.1 of the Act.

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Nevada:

The Nevada Revised Statute (NRS) Chapter 116.3115 (2) (b) states: The association shall establish adequate reserves, funded on a reasonable basis, for the repair, replacement and restoration of the major components of the common elements. The reserves may be used only for those purposes, including, without limitation, repairing, replacing and restoring roofs, roads and sidewalks, and must not be used for daily maintenance. The association may comply with the provisions of this paragraph through a funding plan that is designed to allocate the costs for the repair, replacement and restoration of the major components of the common elements over a period of years if the funding plan is designed in an actuarially sound manner which will ensure that sufficient money is available when the repair, replacement and restoration of the major components of the common elements are necessary.

NRS 116.31152 further states: The executive board shall:

(a) At least once every 5 years, cause to be conducted a study of the reserves required to repair, replace and restore the major components of the common elements;

(b) At least annually, review the results of that study to determine whether those reserves are sufficient; and

(c) At least annually, make any adjustments to the association’s funding plan which the executive board deems necessary to provide adequate funding for the required reserves.

2.  The study of the reserves required by subsection 1 must be conducted by a person who holds a permit issued pursuant to chapter 116A of NRS.

3. the study of the reserves must include, without limitation:

(a) A summary of an inspection of the major components of the common elements that the association is obligated to repair, replace or restore;

(b) An identification of the major components of the common elements that the association is obligated to repair, replace or restore which have a remaining useful life of less than 30 years;

(c) An estimate of the remaining useful life of each major component of the common elements identified pursuant to paragraph (b);

(d) An estimate of the cost of repair, replacement or restoration of each major component of the common elements identified pursuant to paragraph (b) during and at the end of its useful life; and

(e) An estimate of the total annual assessment that may be necessary to cover the cost of repairing, replacement or restoration of the major components of the common elements identified pursuant to paragraph (b), after subtracting the reserves of the association as of the date of the study, and an estimate of the funding plan that may be necessary to provide adequate funding for the required reserves.

4.  A summary of the study of the reserves required by subsection 1 must be submitted to the Division not later than 45 days after the date that the executive board adopts the results of the study.

Effectively establishing what is among the most detailed regulatory language governing the reserve studies for common interest realty associations of any state in the U.S.

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N. Carolina:

N. Carolina law does not require condominium or homeowners associations to perform a reserve study or to include a provision for reserve funding in the annual budget.

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Oregon:

Planned developments and condominiums in the state of Oregon are governed by Oregon Revised Statute (ORS) 94 and 100. Both the Planned Development Act (ORS 94) and the Condominium Act (ORS 100) require reserve studies for all common interest communities formed after October 1999. Subsequent changes to both statutes in 2006 made it mandatory for all associations which are required under either Act to conduct a reserve study, to also prepare a written maintenance plan describing the maintenance, repair and replacement procedures for all common area components which the association is responsible for maintaining.

Any common interest realty association formed prior to the 1999 law may opt not to prepare a reserve study and maintenance plan. However, any association which voluntarily chooses to conduct a reserve study, but would otherwise not be required to do so under the law, is thereafter required to comply with the 1999 statute and all subsequent revisions governing the preparation of reserve studies; such as the 2006 requirement to prepare a maintenance plan.

All reserve studies must be updated annually after the original study is completed. No statutory requirement exists for conducting another reserve study after an initial study is completed. As long as the most recent study is updated annually, the association is in compliance with state law.

There is no statutory requirement for the study to be performed by a reserve study professional or anyone possessing any particular expertise or qualifications. There is no licensing or certification process for professional reserve study practitioners, and there is no restriction preventing community managers, management companies, association boards or members from conducting their own studies.

Associations may, on an annual basis, choose not to fund the reserve account by a unanimous vote of the owners. Condominium associations consisting of 1 or 2 units are exempt from the requirements of ORS 100.

Revisions to ORS 100 were pending at the time this narrative was prepared. Changes to the statute which affect condominium communities will be posted in this section once they are known.

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S. Carolina:

S. Carolina law does not require condominium or homeowners associations to perform a reserve study or to include a provision for reserve funding in the annual budget.

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Texas:

Texas law does not require condominium or homeowners associations to perform a reserve study or to include a provision for reserve funding in the annual budget.

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Utah:

Utah law does not require condominium or homeowners associations to perform a reserve study or to include a provision for reserve funding in the annual budget.

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Washington: The Washington Condominium Act (RCW 64.34) was amended in 2008 to require most condominium associations to conduct a reserve study. The statute requires the original reserve study to be based on a physical inspection of the common components, referring to this process as a “Level 1” reserve study. The original Level 1 study must be updated annually and every 3rd year the study must be updated based on the results of a new physical inspection of the common area components. This 3 year update is classified as a “Level 2” study in the language of the Act.

Level 1 and Level 2 reserve studies must be conducted by reserve study professionals, which are loosely defined by the Act as individuals possessing suitable experience, knowledge or education to conduct a reserve study. Updates may be performed by anyone, including association representatives or managers. However, the original study and the 3 year update must be performed by a “professional” as defined by the Act.

The Act also requires a statutory disclosure to be included in all reserve studies. The exact language of this disclosure is included in RCW 64.34. There is no statutory requirement for any association to actually fund a reserve account. As long as the association conducts a reserve study and updates the study according to the requirements of the Act, they are considered to be in compliance with the law.

The Act does require all sellers of condominium properties to disclose the current status of the association’s reserve fund. Therefore, if an association has conducted a study but chosen not to fund the reserve account at all; or have chosen not to fund the account according to the recommendations of the reserve study provider, these facts must be disclosed to prospective buyers prior to execution of any earnest money agreement or purchase and sale agreement. Failure to disclose material facts regarding the association’s reserve funding status is grounds for rescission of any agreement to purchase real property.

If an association’s board of directors fails to conduct a reserve study as required by RCW 64.34, the owner’s may petition the board and demand that a reserve study be conducted. The petition must be made in writing and must be subscribed to by a minimum of 20% of the voting members of the association. Should the board receive a duly executed petition demanding that a reserve study be performed, the board must budget for a study in the next annual operating budget and must take necessary action to cause a reserve study to be completed during the budget year when funding has been approved.

Revisions to RCW 64.34 were pending at the time this narrative was prepared. Changes to the statute which affect condominium communities will be posted in this section once they are known.