The state of Hawaii has adopted specific statutes related to reserve studies, which are set forth in section 514B-148 of the Hawaii Condominium Act.
Hawaii statutes generally state the the following requirements of the reserve study:
Disclosures that must accompany the annual budget
Requirement to fund a minimum of 50% of estimated replacement reserves, or 100% if using the cash flow method of calculating reserves
Describes computation method for reserves
Requires separate designated reserves for each component where repair or replacement costs will exceed $10,000
Requires a minimum funding projection period of 20 years
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 too long. 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.