Yes, Virginia, property owners’ associations and condominium associations are required to have a reserve study. At least once every five years an association must obtain a study to determine the necessity and amount of reserves (i.e. financial savings) required to repair, replace and restore capital components. Capital components are those items, regardless of whether they are part of the common area or common elements, for which a) the association has an obligation to repair, replace or restore, and for which b) the board or executive organ determines that funding is necessary.
Once the association has obtained a reserve study, the board or executive organ must review the study on an annual basis to determine whether the reserves are sufficient. For example, if the association had an unexpected requirement to restore a portion of its streets during the year, the board or executive organ must make adjustments to the reserve study to make sure the association is collecting enough money in its budget to fund the reserve account.
The reserve study provides an association with an estimate of when capital components will need to be replaced and an estimate of costs. Sometimes a capital component needs replaced earlier or the replacement cost has increased. In those situations, it is incumbent on the board to make the necessary adjustments to provide additional funding for the reserve account.
Associations do not want to be faced with a situation where it must undergo required, but expensive repairs without the necessary funds. In that situation, the board may be faced with a special assessment that will require a steep increase in the amount that homeowners pay. A proper reserve study, and compliance with its findings helps avert this situation.
In Part 2 of this series, we will review how associations fund reserve accounts.
Tarley Robinson, PLC, Attorneys and Counsellors at Law
Republished by Blog Post Promoter