Reserve Study and Funding

Reserve studies are budgetary planning tools to help community associations understand and prepare for the maintenance and replacement of the components of the community association for which it is responsible. A Reserve Study includes a Physical and Financial analysis along with a recommended Funding  plan for providing adequate funding such that execution of these projects can occur without reliance on additional supplemental funding sources.  

CAI supports policy that requires reserve studies to be prepared in compliance with the most current edition of the Reserve Study Standards. CAI supports mandated reserve studies and funding for new and existing community associations as well as periodic reserve study updates be performed.

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 maintenance and replacement of shared common components. Typically, for existing association, these costs are determined during the annual budget process and funded by ongoing assessments charged to the homeowners in the community. It is particularly important that, for new communities, developers create an initial budget that adequately provides for both operating expenses and reserves. While each community association is unique, the design drawings and governing documents provide a basis upon which to estimate reserve funding. 

Policy

Community association boards should understand their communities' financial and physical condition and be preparing for the future.  Reserve studies, when prepared in conformance with the Reserve Study Standards 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 for all residential community association types that mandates Preliminary reserve studies (by the developer before or during the construction), with an Update with a Site Visit also prepared by the Developer at the time of turnover to the community association to reflect the as built community as well as the sequence of construction. CAI also supports legislation mandating that, after turnover, associations have periodic reserve study updates with site visits prepared as well as reserve funding to reflect the result of these studies.

Disclosing Findings 

CAI supports legislation that mandates disclosure of all reserve study recommendations and the accepted funding plan along with proof of funding be included in the purchase and sale agreements when the development is turned over from developer control and reserve study recommendations  and accepted funding plan along with proof of funding be provided to any new buyers as part of a standardized disclosure. Disclosure should also be mandated for existing associations during annual budgeting to include a summary of their reserve fund balance as compared to the accepted reserve funding plan.

Legislating Reserve Funding

CAI supports legislation which mandates Reserve Study’s and adequate funding for residential community associations of all types. Legislation should include a practical legislative process for community associations to comply with these requirements. CAI understands the need for communities to maintain an adequate amount of money in reserve funds but that it may not be feasible for some communities to immediately establish the required funding amount. Therefore, CAI supports and recommends mandates for community associations to comply with any funding requirements resulting from a reserve study and funding legislation, while still allowing communities to slowly catch up to that amount over a reasonable period of time

CAI opposes legislation that would allow owners to waive or opt out of reserve funding requirements. CAI also opposes legislation that would prohibit including structural or engineering inspections by appropriate professionals and the financial impact of said inspections in the reserve study and funding plan. Finally, CAI opposes legislation that restricts the borrowing from reserves for other purposes.