How much should be in the reserve accounts?

 

 

 

Unfortunately, there is no "per unit" or "safe" amount that you would look for in the Association's financials, nor is there any particular formula to use. The amount which should be set aside for long-term maintenance may be drastically different for each different Association, because all Associations have very different maintenance needs. For example, a homeowner association with a community clubhouse and pool will have much higher common area maintenance needs than a homeowner association with no common areas other than a sign at the front of the neighborhood. In the world of condos, there are generally more "common" items that are paid for by the Association than would be found in an HOA, but every condominium regime is structured differently with regard to which portions the owners pay for and which portions the Association pays for.

Notwithstanding the foregoing, you should obtain and carefully inspect the most recent reserve study for any Association you're interested in buying into. Both the Condo and POA Acts require that all Associations perform a reserve study at least once every 5 years, and that they re-visit the results of that study at least once every year. The reserve study is supposed to show a breakdown of all of the long-term common area maintenance needs of the Association, and then give a suggested amount which should be collected from the owners each month so that there will be no large or unexpected special assessments for maintenance in the future. If you find that the Association has no reserve study, that's a warning sign that the Board is not keeping track of reserves and maintenance responsibilities like they should be. If you do obtain a reserve study, then you can compare the findings in that reserve study with the financial records of the Association to see if they're staying "on track" with how much they're supposed to be collecting and saving each year.

Generally, you are not able to get access to financial records or reserve studies for a condo association until you receive what's known as a "resale package." And you generally do not obtain a resale package until after you've signed a contract to purchase a condo unit in that association. From the date you receive the resale package, you only have 3 days in which to review the package and cancel the contract if you see something you don't like. Thus, there is a very narrow and specific window of time during which you can obtain and review the information needed, and to make a decision on what to do. The details of resale packages for condos is described in Virginia Code Section 55-79.97.

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What do the laws require for Reserves?

 

Q.  I am the President of a 6-unit condominium and recently one of our owners said we are required to do a Reserve Study. Does VA law require the board to conduct a reserve study or just to have a reserve? If yes, how often? We are a small association with minimal maintenance and common property. We'd rather handle this ourselves but we obviously also want to follow the law.

A.  Thank you for bringing up this topic – it is quite timely as you will see.  Further, even though you are a small condominium association, the Association is probably responsible for replacing almost all components of the building(s) which are of significant value to the owner, so your reserves are as important as any larger association.

Both the Condominium Act (§55-79.39 et seq.) and the Property Owners’ Association Act (§55-514.1 et seq.) require that Associations conduct a reserve study at least every five (5) years to determine the necessity and amount of reserves required to repair, replace and restore the capital components; review the results of that study at least annually to determine if reserves are sufficient; make any adjustments the board of directors deems necessary to maintain reserves, as appropriate; and provide a copy or summary of the reserve study report to prospective purchasers.  Since these provisions went into effect on July 1, 2002, the last possible date that an association can do the study and be in compliance with the law was July 1, 2007.

The study is restricted to components of the Association property which are to be replaced by the Association according to the documents.  This is usually just common elements (such as streets, community buildings and recreational facilities), but it can include portions of limited common elements or units if the documents so specify.

While the law does not specify who must conduct the reserve study.  We strongly recommend that unless your Association truly requires only minimal replacement of common facilities that you have the reserve study done by an independent architect or engineer. 

A reserve study typically consists of three parts:

  • Components.  The estimated replacement cost, estimated remaining life, and estimated useful life of each capital component or item, whether or not a part of the common elements, for which the association has the obligation for repair, replacement or restoration and for which the board of directors determines funding is necessary.
  • Funding.  The current amount of accumulated cash reserves set aside to repair, replace or restore the capital components and the amount of the expected contribution to the reserve fund for each fiscal year.
  • Procedures.  A general statement describing the procedures used for the estimation and accumulation of cash reserves and the extent to which the association is funding its reserve obligations consistent with the study currently in effect.

If inadequate funds are set aside, members could claim the board is negligent in its fiduciary duty to be prepared to replace Association assets which become obsolete or fail to perform their function; that is, to protect association assets.  With the amount of the detail and knowledge of building materials required, it pays to have a professional prepare reserve studies when you have more than two or three types of items for which you are responsible.

In summary, we strongly urge all associations regardless of size who have not complied with state law to either prepare their own study or hire an independent professional to prepare it for you. In addition to doing the initial reserve study, remember that you are required to have it updated at least every 5 years and to review the study each year to make sure the board is properly funding its reserve requirements.

Also be mindful that the resale disclosure laws require that the study or a summary thereof be furnished to each prospective buyer with each and every resale certificate.  Failure to prepare a reserve study or properly fund it could result in mortgages being denied for home sales and potential liability for Boards of Directors.  If you are a professionally managed community, your manager will be able to direct you to a qualified professional to perform the study.  If you are self managed, you may wish to visit the web site of the Southeastern Virginia Chapter of the Community Association Institute (www.sevacai.org) which has the names of sponsors displayed, a couple of which prepare reserve studies.

 

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Maintaining Reserve Funds

QUESTION:  The condo Board has raised the condo fees 51% in the last 5 years.  From one week to the other one they decided to increase from 5% to 10% for 2008 stating that the state of Virginia has a new law saying that the reserves needs to meet "x" amount. Is that true?

Is there anything we the neighbors can do to stop the Board from raising the fees that much?

Thank you very much!

 

RESPONSE:

The Virginia Condominium Act (Sec. 55-79.83:1) requires 3 things that each association must do with regards to reserves:

1. Conduct a reserve study at least once every five years.

2. Review that reserve study at least once every year.

3. Make any adjustments necessary, as determined by the Board.

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Reserve Studies

Q. I am the President of a 6-unit condominium and recently one of our owners said we are required to do a Reserve Study. Does VA law require the board to conduct a reserve study or just to have a reserve? If yes, how often? We are a small association with minimal maintenance and common property. We'd rather handle this ourselves but we obviously also want to follow the law.

A. Thank you for bringing up this topic – it is quite timely as you will see. Further, even though you are a small condominium association, the Association is probably responsible for replacing almost all components of the building(s) which are of significant value to the owner, so your reserves are as important as any larger association.

Both the Condominium Act (§55-79.39 et seq.) and the Property Owners’ Association Act (§55-514.1 et seq.) require that Associations conduct a reserve study at least every five (5) years to determine the necessity and amount of reserves required to repair, replace and restore the capital components; review the results of that study at least annually to determine if reserves are sufficient; make any adjustments the board of directors deems necessary to maintain reserves, as appropriate; and provide a copy or summary of the reserve study report to prospective purchasers.  Since these provisions went into effect on July 1, 2002, the last possible date that an association can do the study and be in compliance with the law is July 1, 2007.

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