As if the financial challenges associated with addressing the common elements of aging communities aren’t enough, the passage of Colorado House Bill 1359 during the 2009 legislative session brought the issue of reserves to the forefront.  Based upon the confusion that some associations have with the subject - we think that’s a good thing. 

Common questions we are routinely asked include:  What exactly are “reserves?” Is our association required to conduct a reserve study?  But probably the most important inquiry we receive is:  “Since the new law does not require us to actually fund reserves – what should we do?”

Reserves

“Reserves” are funds that associations set aside to cover the anticipated costs associated with the replacement of – and significant repairs to – major common area components that associations are obligated to maintain.  These common areas, also sometimes referred to as common elements, are identified in the Declaration of Covenants, Conditions and Restrictions of associations.

Reserves are not intended to fund the routine maintenance of common area components.  Instead, routine maintenance should be included as part of the operating budgets of associations.

Statutory Requirements for Associations

While HB 1359 does not require associations to actually fund reserves, the new law does  require all associations to adopt a reserve policy that addresses:  (a) when a reserve study shall be prepared for the portions of the community maintained, repaired, replaced, and improved by the association; (b) whether the reserve study is based on a physical and financial analysis; (c) whether there is a funding plan for any work recommended by the reserve study; and, if so, (d) the projected sources of funding.

The new law does not technically require associations to conduct a reserve study.  The section of an association’s reserve policy that addresses “when a reserve study shall be prepared” could state the association does not intend to have a reserve study conducted. However, unless your association has no common areas for which it is responsible – we highly recommend that your association have a reserve study prepared which should include a recommended funding plan.

Planning Tool

The whole point of a reserve study is to provide associations with a planning tool to determine the remaining life of the physical components the association is required to maintain and the anticipated timeframe and costs associated with the replacement of and major repairs to those components.  Without the benefit of a reserve study, associations do not have the proper tools necessary to plan and budget for significant future expenditures. 

While the new law does not require associations to actually fund reserves to address future financial obligations, it is essential for associations to plan for the future.  Every association is different and there is no “one-size-fits all” approach to planning for significant expenditures.  As a result, each board of directors should ask the following questions:

1. Does it make sense to have the funds necessary to cover the costs of major repair or replacement obligations in reserves at the time the funds are needed?  If so, will this require an increase in assessments to ensure funds are available to be deposited into reserves?  If we don’t want to increase assessments to make contributions to reserves, how can we budget to ensure we are able to make appropriate contributions?
2. Instead of relying upon reserves, does it make sense for the association to utilize a loan to cover such costs?  Do the governing documents of the association permit the association to borrow money for this purpose?  Is the association eligible for a loan?
3. Instead of funding reserves through regular assessments, does it make sense to levy a special assessment to cover costs at the time the funds are needed?  Do the governing documents permit the use of special assessments in lieu of reserves?  Would a special assessment create a financial hardship for homeowners?

Reviewing reserve study data and taking the time to answer these questions will give boards the information necessary to make important decisions on preparing for significant future expenditures.  It will also help eliminate those gut wrenching moments that boards face when they can no longer put off a major project and don’t have the funds to cover the costs.