The state of Arizona has adopted specific statutes related to reserve studies, which are set forth in section 33.1255 of the Arizona Condominium Act.
The Arizona Condominium Act (A.R.S. 33-1201, et. seq.) generally requires the distribution of the Association’s policy of annual assessments for common expenses. Common expenses are defined as including any allocations to reserves. There is no provision in the Condominium Act that requires the Association to prepare a reserve study and contains no requirements as to how the reserves are to be calculated. Arizona has no statutory provisions requiring a planned community association to prepare a reserve study or to fund reserves.
Arizona does have a statutory requirement for both condominiums and planned communities that requires certain disclosures upon the resale of a unit /lot within an association (A.R.S. 33-1260). Specifically, the purchaser must be provided with a statement regarding the total amount of money held by the association as reserves. The purchaser must also be provided with a copy of the most recent reserve study of the association if one exists.
Common industry practice is that homeowners associations should perform periodic reserve studies as a prudent business practice. Directors of associations are generally held to a “prudent businessman” rule in determining whether or not they have met the fiduciary duty of their position for the association. A prudent businessman would establish a capital replacement budget (reserve study) to make sure he is generating enough revenues (reserve assessments) to provide for major repairs and replacements.
There is little discussion about whether an association should perform a reserve study. The only significant areas of discussion revolve around how frequently a reserve study should be performed, and if there should be any minimum funding requirements. Most states that have reserve study statutes require physical site inspections on 3 or 5 year cycles. We believe that 5 years is generally too long and even 3 years may be too long if significant reserve expenditures are being made during the subject time period. However, the association should perform an update without site inspection every year as part of the annual budget process. Contact Facilities Advisors for your reserve study needs.
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