Association Reserve Studies are a vital component of setting budgets for community associations.
Community Associations typically have at least two budgets/accounts: operating expenses and reserves.
Operating expenses are for those normal day to day expenses such as staff, maintenance, utilities, taxes, etc.
Reserve funds are set aside for those big ticket items that are know (or could possibly) be incurred. These might include updating common buildings, replacing roofs, painting structures, roadwork, major landscaping projects and other things specified in your governing documents. If little money has been allocated to the reserve fund, it's possible special assessments may need to be used, which pleases no one.
From a board member perspective, setting proper reserves is an important fiduciary duty and a common source of lawsuits against association boards. To properly set reserves, association reserve studies need to be done. A reserve study is so important that some states even require by law that a reserve study be done. Here's the requirements in our area:
Delaware Association Reserve Study Requirements:
Annual budget must include Reserve contributions “sufficient” to achieve the level of funding noting in the Reserve Study. Minimum contributions to Reserves vary based on the Reserve Study or a statutory formula based on number of common area components (i.e.: with four or more common area component categories, Reserve contributions must be at least 15% of the total budget.) See Delaware Title 25, Section 81-315.
Maryland Association Reserve Studies
Annual budget required to provide for Reserves, but does not require a specific level of reserve funding.
For a complete listing of reserve study requirements by state, please visit ReserveStudy.com.
How Often Should Association Reserve Studies Be Done?
Best practices suggest that a comprehensive reserve study be done to ensure you have sufficiently set your reserves. A less intensive annual review should then be done, with another comprehensive review carried out every three years or so. This will depend on your specific situation, the condition of your buildings, your local economy and other factors.
Additionally, it's the board's responsibility to keep the operating and reserve funds separate, and studies should be done well in advance of voting on annual budgets so that each board member has a chance to review the study.
A well-planned and executed reserve study that is done in accordance with your governing documents will reduce fiduciary liability exposures of your members, provide economic certainty to your members, and will ensure a well-cared for and maintained facility for the foreseeable future.
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