Reserve Study Necessary?

Started by DavidJ2 • 9 replies • 3803 views

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DavidJ2 (Arizona)
Posts: 13

Posted:

Help Please.... Questions are

1. When is a reserve study necessary?
2. Do we need a reserve study or not?

Our Arizona HOA has 389 single family homes and NO common areas. A board member says we need a "reserve study" to see that we have enough money for legal fees in case we need a surplus to pursue architectural litigation. We've only had two litigated Architectural cases in 8 years of existence and won on both counts.

Can someone explain when and what for a reserve study is required and whether or not we even need such a study?

David 623-334-0760 [email protected]

RogerB (Colorado)
Posts: 5,067

Posted:

David, a reserve study is needed only if your Declaration requires it. A reserve study can include many things - amenities, entry monuments, fences, irrigation, common area upgrades, and/or other major items which need replacing once in a while. If you have only maintenance requirements and no other financial needs you may chose to maintain a contingency fund in case insurance will not cover a judgement issued by a court.

BethG (California)
Posts: 6

Posted:

Some state statutes require a reserve study and define what is required. The reference for California is Civil Code Sections 1365. 1365.2 and 1365.5 to find out that is required there. Sometimes other states refer to California law as a guide. I know there are other states with reserve requirements, such as Hawaii and Arizona. I am not sure about the states under the U.C.I.O.A. But you have to look beyond your declaration of restrictions. Even if there is no state statute in your state, and no requirement in the governing documents, what you do for financial planning is a matter of your fiduciary duty (responsibility from your position of trust) to the members and some kind of reserve study and funding plan, and reporting to members, is very important if there are components that are maintained by the association for the benefit of the members.

GeraldT1 (<Not Specified>)
Posts: 519

Posted:

DavidJ2,

A reserve study is for the evaluation of common and limited common elements that will need replacement. As an example, if the HOA has roads that it maintains, that should have been part of a reserve study begun soon after the community was constructed and the developer was off the board. The same goes for retaining walls, detention/retention basins, sidewalks, et..

Do you have any of these common elements.

A reserve study has nothing to do with legal fees or retainer of an attorney. I do not believe it's appropriate to fund attorney fees in conjuntion with funds set aside for a reserve study.

Best of luck!!
GeraldT1
NNj

RogerB (Colorado)
Posts: 5,067

Posted:

Beth, does California require a reserve study when there is no reserve fund, i.e., only maintenance items (never any reserve expenses)? I am not aware of any case where this exists but some posters have said this is their situation.

GlenL (Ohio)
Posts: 5,491

Posted:

Roger in Ohio we have to maintain reserves sufficient to maintain and repair capital items OR the majority of homeowners must vote each year to allow special assessments. So for us a reserve study is a must to make sure we have the funds available as the community ages.

Specifically, Ohio Revised Code Section 5311.081(A)(1) states:
A) Unless otherwise provided in the declaration or bylaws, the unit owners association, through the board of directors, shall. .

(1) Adopt and amend budgets for revenues, expenditures, and reserves in an amount adequate to repair and replace major capital items in the normal course of operations without the necessity of special assessments, provided that the amount set aside annually for reserves shall not be less than ten percent of the budget for that year unless the reserve requirement is waived annually by the unit owners exercising not less than a majority of the voting power of the unit owners association;

Studies show that 5 out of 4 people have problems with fractions

JohnM3 (Florida)
Posts: 288

Posted:

Unless you dont know what things cost it is a waste of money!!!!
Thats why you have insurance

GeraldT1 (<Not Specified>)
Posts: 519

Posted:

JohnM3,

A method that many associations use to determine the cost of items that need replacement is to hire an independent engineering firm to perform a Transition Study and Capital Reserve Analysis. Many associations do the study, or revisit the original one, multiple times during the course of their development.

It's advisable to factor, or at least consider CPI into the equation of the replacement of the elements.

GeraldT1
NNJ

WilliamD (Virginia)
Posts: 13

Posted:

The Virginia Property Owners Association Act which includes HOAs requires a Capital Reserve Fund and requires:
1.Conduct at least once every five years a study to determine the necessity and amount of reserves required to repair, replace and restore the capital components;
2. Review the results of that study at least annually to determine if reserves are sufficient; and
3. Make any adjustments the board of directors deems necessary to maintain reserves, as appropriate.

The Code allows the HOA to establish more stringent requirements in their declarations.

Seems possible other States may do likewise.

Bill

RogerB (Colorado)
Posts: 5,067

Posted:

Bill and Glen, thanks for the information on state statutes in Virginia and Ohio regarding Reserve studies and funding. We recommend updating the HOA's long range reserve study every 3 years and whenever a major expenditure occurs. Also, we start with funds which need to be added to the reserve fund when determining the annual operating fund. As I have previously stated we calculate our 20 year reserve studies using senarios for both 4.0% and 3.5% inflation rate.

Based on the number of HOAs which do not seem to have sufficient reserve funds I think more and more states will pass statutes on this. But it is still up to each Board to do good financial planning.

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