Why is a Home Owner Association Reserve Study Necessary

I’ve heard people ask this question: Why is a Home Owner Association Reserve Study necessary? It’s because a Reserve Study is a planning tool for major repair and replacement of community assets. It details the money to set aside for replacement of assets not in the operation budget.
 
The association must budget for major repair, upgrade, or replacement of assets. That means conducting an inventory of association assets. Then determining the life expectancy of each asset.
Why is a Home Owner Association Reserve Study Necessary
Home Owner Association Reserve Study Budget
Let’s take a building roof as an example:
 
Assume a building’s tile roof has a life expectancy of 40 years. The anticipated cost to replace it in 40 years, adjusted for inflation, is $30,000. Divide $30,000 by 40 years. The result is the amount of money the HOA must contribute to the roof reserve fund line item each year. Therefore, in this example, the HOA must contribute $750 each year. Also, they must repeat that process for each asset.
 
The best way to do this is to hire a Home Owner’s Association Reserve Study Specialist to do the inventory. An association representative familiar with the association assets may assist the Specialist. The specialist will then determine a “useful life” and “cost to replace” for each item. So, if the useful life of the 15 year old roof is 40 years, the line item will show the remaining life of 25 years. The HOA should update the reserve study at least every 2-5 years.
 
A board should provide  a home owner’s association reserve study and keep it updated. This demonstrates that the board is acting by its fiduciary duty. Also, it reduces the individual directors’ exposure to personal liability risk.
 

Arizona HOA Reserve Study Law

There is no Arizona law for a Home Owner Association Reserve Study at the present time. Yet, even without a law, the operating and reserve funds should be in separate bank accounts. An HOA should not commingle the funds. Attorney Jonathan Olcott said a board may use reserve funds for capital improvements. However, they should be prudent and repay the funds to the reserve account. That prevents the account from becoming underfunded.
 
The HOA should fund the reserve fund at a level to provide the funds to replace assets as required. The association should contribute a set amount to go into the reserve account each month.

Why is a Home Owner Association Reserve Study Necessary?

It is important for the board to keep the reserve fund funded. That ensures that today’s owners, who are enjoying the use of the amenities, are paying their fair share. If the HOA under-funds the reserves, future owners will have to make up for the short-fall. That isn’t fair to future owners. Also, if the board under funds reserves, the association may be at financial risk.

Home Owner’s Association Reserve Study Funding Levels

There are three funding levels:
 
  1. Full 100% funding
       As assets age, the fund grows so that it is fully funded at the estimated end of the useful life.
  2. Baseline funding
    Baseline funding allows the reserves to get to, but not below, zero. In this method, there are funds available. But, there is   a  high risk of a special assessment or not being able to repair or replace an asset
  3. Threshold funding
    Threshold funding is any percentage between 0 and 100% that an association chooses to maintain.
An HOA can determine that many assets may never need replacing. That would be because of periodic operational type maintenance and repair. So, they don’t need to be at 100% funded. They could choose to be 80% funded, which is in the low risk category of requiring a special assessment.
 

Risk of Special Assessment

  • 70-130% Funded – Low
  • 30-70% Funded   – Medium
  • 0-30% Funded    – High

Sample Home Owner’s Association Reserve Study

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HOA Nomination Committee, What Does it Do?

Question: Can an HOA board or HOA Nomination Committee determine who can and cannot run for election to the board?
    Answer: It depends on whether the Bylaws give the board that authority.

Question: Can an HOA board or Nomination Committee determine qualifications for a candidate to be able to run for the board?

     Answer: No. Not unless the Bylaws specifically give the board that special authority.

In order to determine if my answers are correct, we need to,

  1. examine the Bylaws of the association, and
  2. examine the laws.

The Law

HOA Nomination Committee, What Does it Do?
HOA Nomination Committee, What Does it Do?

There is no reference to “qualifications of directors” in Title 33, the Planned Community Act; so we now turn to Title 10 Section 3802 for Non-Profit Corporations.

ARS 10-3802. Qualifications of directors

“The articles of incorporation or bylaws may prescribe qualifications for directors…”

Therefore, the law seems clear to me that an HOA board cannot determine qualifications for directors. Any required qualifications must be in the Articles of Incorporation or the Bylaws; and only the association members can amend or add qualifications to those documents.

The Association Bylaws

Below is a section from Article IV Section 1 of an associations Bylaws. The first sentence lists a qualification; however, it is a rather broad qualification. This one allows the association to elect directors who are members and non members. Some associations don’t allow non-members to serve. Therefore, in those latter associations a candidate must be a member to qualify as a candidate for the board of directors.

ARTICLE IV

BOARD OF  DIRECTORS;  SELECTION; TERM OF OFFICE

Section 1. Number. “The affairs of this Association shall be managed by a Board of Directors, who need not be Members of the Association…”

Below is Article V of the same set of Bylaws:

ARTICLE V

NOMINATION AND ELECTION OF DIRECTORS

Section 1. Nomination. “Nomination for election to the Board of Directors shall be made by a Nominating Committee. Nominations may also be made from the floor at the annual meeting of the Members…”

“…The Nominating Committee shall make as many nominations for election to the Board of Directors as it shall in its discretion determine, but not less than the number of vacancies that are to be filled. Such nominations may be made from among Members or non-Members…”

Those Bylaws call for the board to establish a Nomination Committee to nominate candidates for board seats that are up for election. The Nomination Committee must nominate at least the number of candidates to fill the number of seats up for election, but they can nominate as many candidates as they desire.

Question: Does that mean that only the candidates the Committee nominates can run for the board?

Answer: In my opinion, the answer is no, because these Bylaws also allow nominations to be made from the floor at the annual meeting of the Members.

HOA Nomination Committee, What Does it Do?

Answer:  I believe the purpose is to locate people willing to run for election to serve on the board. However, if the Bylaws list qualifications, the Nominating Committee need to determine if the candidates meet those qualifications.

California HOA law doesn’t allow nomination committees. Many other associations have stopped using those committees.

In this blog site, I offer my layperson interpretation of the law and governing documents. All board members should have a working knowledge of the planned community laws and association’s governing documents. Then they can make proper decisions without an attorney present at every meeting,.

The laws are written so the layperson can understand and apply them. However, if there are differing opinions among directors, then it’s time to get a professional opinion.

Jonathan Olcott of” Phil Brown and Jonathan Olcott” law firm generously provided the statement below. The statement is for information purposes only, and should not be taken to be a legal opinion. Jonathan stated:

“This is a challenging question. The statute below (ARS 10-3802) can be persuasively interpreted to mean that qualifications can only be in the Articles or bylaws.

Some might argue that the Board can use its rule making authority to enact additional qualifications. I do not find that persuasive. Especially if there are qualifications in the Articles or bylaws (generally being an Owner and sometimes being in good standing).

I’m not an attorney, but I agree with Mr. Olcott’s statement. That’s because rules are to explain and clarify CC&R’s; but cannot add to, delete, or alter a covenant. Therefore, I don’t believe a qualification can be “added” to the Bylaws by an HOA board, or Nomination Committee. I believe that only the association members can amend the Bylaws to add qualifications.

BOOKS by CAPTAIN BILL TRAVIS

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