Reserve Study and Funding

Reserve studies are useful financial tools to help community associations understand and prepare for the restoration and replacement of common elements. A reserve study includes a physical review, a review of the community's financials, and a recommendation plan made by a reserve professional. 

CAI supports policy that requires reserve studies to be prepared in compliance with National Reserve Study Standards. CAI supports mandated reserve studies and funding for new community developments and periodic reserve studies for communities with major shared components. 

About the Community Association Housing Model

While community associations come in many forms and sizes, all associations share three basic characteristics: (1) membership in the association is mandatory and automatic for all property owners; (2) certain legal documents bind all owners to defined land-use requirements administered by the community association; and (3) all property owners pay mandatory lien-based assessments that fund association operations. 

The community association housing model is actively supported by local government as it permits the transfer of many municipal costs to the association and homeowners. Today, many community associations deliver services that once were the exclusive province of local government. 

Community associations are governed by a board of directors or trustees elected by their members. This board guides the association in providing governance and other critical services for the community usually funded by property taxes. 

Background

Community associations are responsible for what is often considerable maintenance and upkeep of shared common elements. Typically, these costs are determined during the annual budget process and funded by annual association assessments charged to owners in the community. Special services or amenities may be funded through user fees. It is particularly important that developers create an initial budget that adequately provides for operating expenses and reserves, notwithstanding the lack of history related to a particular association. While each community association is unique, reference to similar associations in the same geographic area will typically provide a basis upon which to estimate expenses with reasonable adequacy. 

Policy

Community association boards should always understand their communities' financial and physical state and be preparing for the future. However, reserve studies provide an in-depth, unbiased perspective from a reserve specialist, reserve professional, or other qualified professional (e.g., engineer or architect). 

When Are Reserve Studies Appropriate?

CAI supports legislation that mandates preliminary reserve studies (before or during the construction of a community), and again at the time of developer turnover to the community association, including condominiums, housing cooperatives, and planned communities with major shared components for the member's unit or dwelling or significant infrastructure/site improvements (i.e. roads, street lighting, accessory buildings, etc.) CAI also supports legislation mandating periodic reserve studies for communities with significant infrastructure and/or shared components whose aggregate replacement costs exceed $10,000. 

Disclosing Findings 

CAI supports legislation that mandates disclosure of all reserve study findings be included in the purchase and sale agreements when the development is turned over from developer control (if applicable) and reserve study findings and funding plan to any new buyers as part of a standardized disclosure. Disclosure should also be mandated during the annual budgeting and include a summary of reserve financial condition and the funding plan. 

Legislating Reserve Funding

CAI supports legislation which mandates reserve funding for community associations, including condominiums, housing cooperatives, and planned communities with major shared components in buildings containing dwellings. Legislation should include a practical legislative process for community associations to comply with funding requirements. CAI understands the need for communities to maintain a certain amount of money in reserve funds but that it may not be feasible for some communities to immediately procure those funds. Therefore, CAI supports and recommends mandates for community associations to comply with any funding requirements resulting from a reserve study legislation, while still allowing communities to slowly catch up to that amount.