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Reserve Funds and Reserve Studies for Homeowners Associations

The Planned Community Act (Ohio Revised Code Chapter 5312) governs homeowners association and requires reserve funds.  The Act specifically states:

5312.06. (A) Unless otherwise provided in the declaration or bylaws, the owners association, through its board of directors, shall do both of the following:
(1) Annually adopt and amend an estimated budget for revenues and expenditures. Any budget shall include reserves in an amount adequate to repair and replace major capital items in the normal course of operations without the necessity of special assessments, unless the owners, exercising not less than a majority of the voting power of the owners association, waive the reserve requirement annually.

The Act requires that homeowners associations have a reserve fund adequate to repair and replace common areas, which are major capital items, without having to specially assess owners, unless a majority of the association votes to waive the requirement on a yearly basis.  Each association has to individually determine what an adequate reserve fund looks like.

The drafters of the reserve fund provision purposely made the requirement non-specific because some homeowners associations have a large number of common areas and others have very few.  For example, some homeowners associations may have a pool, clubhouse, docks, tennis courts, and roadways to maintain while another homeowners associations across may only have an entrance sign and landscaping.  Then, of course, there are homeowners associations somewhere in the middle. 

A reserve study is a tool available to assess the useful life of common areas/capital items and to determine the estimated cost for the repair or replacement based on the item’s useful life.  The report from a reserve study will give associations a timeline and a breakdown of how much the association needs to save on a yearly basis so that funds are available for the repair or replacement when the need arises.  A reserve study is very useful and recommended for a homeowners association with a great deal of amenities and common areas.  However, for the homeowners associations with a sign, it does not make financial sense to pay thousands of dollars for a reserve fund to tell you that the association will need a few thousand dollars for sign replacement in 5 or 10 years.

As a reminder, regular maintenance of common areas is part of the annual operating budget and not considered a reserve item. A complete replacement or major repair that is not anticipated on a yearly basis is a proper reserve item.  For example, yearly patching of a private road would be an expense item contained in the operating budget, but the repaving of the road would be a reserve item to be saved for each year.

A reserve study helps an association prepare the annual budget and properly plan an adequate reserve contribution.  It also gives an association the security that if for some reason the reserve is not sufficient in the future, at least due diligence was taken to try and plan for the future.

Instead of a reserve study, a homeowners association could have contractors estimate the replacement and major repairs of common areas.  Those estimates could be used to estimate an adequate reserve fund. Remember to revisit the issue periodically to reassess any new needs.

 Keep in mind that the Act does not require a reserve study.  It requires that homeowners associations maintain adequate reserves to operate without specially assessing the owners for major repairs and replacements unless the requirement is waived on an annual basis.  The reserve study is a tool to guide you in your reserve planning.  If you can adequately plan without the reserve study, then you do not have to get the study done.

In the event that a majority of the owners make the decision to waive the requirement, then the association does not have to fund the reserve.  

The consequences of the waiver are that all owners are on notice that they could be subject to special assessments should the need arise.  Further, anyone who sells their property will need to disclose upon sale to prospective purchasers that the reserve requirement was waived for the association.

Waiving the requirement can further have an impact on sales of properties within the association in that finding financing may be difficult.  Many lenders take the reserve fund into consideration in their decision on whether or not to lend money to a borrower.  Further, in order for a borrower to obtain any government insured financing, the reserves must be adequately maintained or the loan can be denied.  While waiving the reserve may keep your assessments lower, ultimately it can hurt the Association and hinder resale of the properties within the community.

As always, each homeowners association has different needs regarding its reserve fund.  If your association has questions regarding its reserve fund, please contact us.

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