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.
The study is restricted to components of the Association property which is 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 Board of Directors. The July deadline is approaching, so now is the time to act. 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.