Whether you’re a community association manager, board member, or resident, having a firm grasp on the legal reserve fund and reserve study requirements in your state is crucial to your community’s well-being. Prior to the tragic collapse of Champlain Towers South in June of 2021, many states already had legislation requiring reserve studies and the funding of condo and HOA reserves, but the collapse catalyzed additional states implementing similar legislation. As awareness surrounding the importance of both reserve studies and funding reserves continues to grow, we commonly see the question, “are reserve studies required in my state?”
What is a reserve study?
Reserve studies are a financial planning tool for community associations that evaluate the condition of the association’s common elements, estimate their remaining useful life, and predict the cost to repair or replace those elements when their useful life ends. Reserve study reports present a 30-year capital plan, detailing schedules for both repairs/replacements and reserve funding, ensuring adequate reserves are available to complete each project on time.
The importance of regular inspections and a reliable financial plan both highlight the reason that many states have enacted legislation requiring these studies. Without them, associations are flying blind into their futures, which can have ultimately devastating impacts.
What states have legal requirements for reserve studies?
While some states have requirements in place to conduct regular reserve studies, other states have statutory guidance in place but no legal requirements. Similarly, some states have condo or HOA reserve fund requirements, while others do not. Here, we will cover the states that legally require reserve studies or reserve funding.
Before we dive in, it’s important to note that community associations are governed by state law, which can vary widely. While we will provide a basic summary of reserve study legal guidelines and requirements, we are not legal experts, and this blog is intended for general educational purposes only – it should not replace advice from a lawyer, manager, accountant, or other professional, and is not comprehensive in nature.
California: Boards must annually review and update the reserve study, with a visual inspection of the property required every three years. As part of the annual budget process, the reserve study update must be used to develop the budget, and that information must be disclosed to unit owners. There is no statutory requirement to fund reserves.
Colorado: Associations are required to adopt a policy stating when reserve studies will be conducted, whether there is a funding plan for expenditures outlined in the study and the source of that funding, and whether the study includes both a physical and financial analysis. There is no statutory requirement to fund reserves.
Connecticut: Annual budgets must include adequate reserves for capital expenditures and unit owners must be provided with a summary of the budget, including the amount of reserve funds and a disclosure of how reserves are calculated and funded. There is no statutory requirement to conduct a reserve study.
Delaware: Reserve studies must be performed or updated every five years for condominium associations, and annual budgets must include reserve contributions adequate to the recommended level of funding in the reserve study. Annual budgets must also include a line item funding any repair or replacement reserve.
Florida: Condominiums and cooperatives of 3 stories or more are required to conduct a structural integrity reserve study (SIRS) and update that study every 10 years, and the SIRS must include a specific set of structural assets. Any budget adopted on or after December 31, 2024, requires that the SIRS be used as the basis for funding structural reserves, and the association cannot elect to waive funding for structural items. HOAs or condos that are less than three stories do not require a reserve study, but they must submit a fully funded annual budget with a reserve schedule, after which they can vote to fully fund reserves, partially fund reserves, or waive funding.
Hawaii: Associations must review and update their own reserve studies annually, including the amount collected in reserves for the coming year, with an independent professional reserve study update required every three years. Condo and HOA reserve accounts must be funded at a minimum of 50% of estimated replacement costs, or 100% if using the cash flow method. Cash flow plans must be based on 30-year projections.
Illinois: Annual budgets must include “reasonable reserves” for capital expenditures for maintenance, repairs, and replacements, and the board must disclose reserve contributions made over the previous year. To determine what constitutes “reasonable reserves,” associations should consider an independent professional reserve study, but there is no statutory requirement to conduct a reserve study.
Maryland: All condos and coops, and HOAs whose common elements have a combined cost of at least $10,000, require an independent reserve study and that study must be updated every five years. The annual budget must include the level of reserves, and reserves must be funded according to the most recent reserve study.
Massachusetts: Associations must maintain an “adequate replacement reserve fund” separate from operating funds. There is no statutory requirement to conduct a reserve study.
Michigan: Associations must maintain a reserve fund that, at a minimum, equals 10% of the annual budget. However, an association’s bylaws must contain a declaration stating that the minimum 10% may be inadequate, and the association should determine if a greater amount should be set aside. There is no statutory requirement to conduct a reserve study.
Minnesota: Annual budgets must include “adequate replacement reserves,” including past and future contributions, to fund the replacement of common elements. Associations must re-evaluate the adequacy of their reserves every three years, but there is no statutory requirement to conduct a formal reserve study.
Nevada: Reserve studies must be conducted every five years, and associations must establish “adequate reserves funded on a reasonable basis.” Annually, the board must internally review the study to determine if reserves are adequate or if adjustments must be made.
New Jersey: Associations whose common elements have a combined cost of at least $25,000 must conduct a reserve study and update that study every five years. New associations must conduct their initial reserve study within two years of electing a majority of the board. Communities are also required to adequately fund reserves according to the reserve study, but timing to achieve adequate reserves depends on what percentage of the annual budget is made up of contribution increases.
Ohio: Budgets must include adequate reserves to repair and replace major capital elements without reliance on special assessments. There is no statutory minimum reserve contribution, but best practice is to set aside funds per a reserve study. However, there is no statutory requirement to conduct a reserve study.
Oregon: A reserve account must be established to fund major maintenance, repair, or replacement for all assets requiring such work in the next 30 years. Boards must annually conduct a reserve study or review and update an existing study to determine reserve account requirements.
Tennessee: Associations whose common elements have a combined replacement cost exceeding $10,000 must conduct a professional reserve study and update that study every five years. There is no statutory requirement to fund reserves.
Utah: Associations must conduct a reserve study, at a minimum, every six years. Reserve studies must be reviewed and updated, if necessary, at a minimum, every three years, however, these updates do not have to be completed by a professional. Budgets must include a reserve fund line item, but there is no statutory requirement to fund reserves.
Virginia: Reserve studies must be conducted at least once every five years, and the board must review the study annually and make adjustments to ensure sufficient reserve funding.
Washington: Professional reserve studies are required for all associations and must be updated professionally with a site visit every three years. The study should be reviewed internally on an annual basis. If an association does not have a reserve study, this must be disclosed in public offering statements. Associations are encouraged to establish a reserve account to fund maintenance, repair, and replacement work occurring in the next 30 years, but there is no statutory requirement to fund reserves.
Reserve Study Compliance
Managers have an obligation to understand the legal requirements for their communities and guide them in remaining compliant. To ensure legal compliance with reserve studies and reserve funding, it’s crucial to understand your state’s specific laws and regulations in addition to your community’s governing documents. However, there are other factors that influence an association’s ability to avoid legal pitfalls when it comes to reserves.
Managers and boards have a fiduciary responsibility to manage the association’s finances wisely, so failing to adequately fund reserves could lead to a breach of fiduciary duty. Because underfunding can lead to deferred maintenance, increased costs, special assessments, and potential legal liability, hiring a qualified professional to conduct your reserve study is paramount. CAI’s Reserve Study Standards recommend studies be prepared by a designated Reserve Specialist, as they are the most qualified individuals to conduct reserve studies and create reserve funding plans.
Most managers will receive questions from residents about where their dues are going, so it’s wise for managers to review the reserve study and capital expenditure forecast with residents. By informing the community about where their money is going and when, managers can foster a sense of transparency and trust within the community.
Navigating state laws on reserve studies and reserve funds can be complex, but it’s crucial for board members, managers, and even residents to have a grasp of what their state may or may not require. To ensure reserve study compliance with a full breakdown of your state’s laws, please visit CAI’s Reserve Studies and Funding Resources.
