State of Ohio

State of Ohio statute 5311.081 A.1. states that the Board of Directors is responsible to, "Adopt and amend budgets for revenues, expenditures, and reserves in an amount adequate to repair and replace major capital items in the normal course of operations without the necessity of special assessments, provided that the amount set aside annually for reserves shall not be less than ten percent of the budget for that year unless the reserve requirement is waived annually by the unit owners exercising not less than a majority of the voting power of the unit owners association."

While this condominium law for reserve funds does not specifically require the performance of a reserve study, the requirement to adopt a reserve budget essentially does the same thing. We believe it is appropriate for Ohio associations to perform reserve studies periodically, and recommend a 3-year cycle as the appropriate period.

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. Three 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.

The reserve study is effectively a long-term capital budget for future major repairs and replacements. The reserve preparer performs an on-site analysis of components, evaluates condition, and determines useful and remaining life. The next step is to determine current replacement cost. The projection of future expenditures is based on these factors, and should include an inflation factor to determine the future cost at the time the expenditure is expected to occur.. To complete the financial projection, an assessment level is then projected in an amount sufficient to meet all projected expenditures. This may occasionally require a special assessments, if prior assessment levels were set too low. Assessments may be calculated under either the component or cash flow method. A percent funded calculation is sometimes made to measure the ratio of projected reserve balances against an "ideal" balance. The ideal balance is generally defined as the amount of money that should have been set aside for the major repairs or replacements at any given point in time. Unfortunately, there are a number of different methods of calculating this ideal balance, and they can result in substantial differences in the percent funded ratio.

The reserve study report is a budget. The first year' reserve assessment is intended to become part of the association's annual operating budget, as the amount that should be transferred to reserves that year. Since long-term estimates become less reliable over longer time periods, the reserve study should be updated on a regular basis or it will become outdated and unreliable. It is generally recommended that reserve studies be updated , at least informally, on an annual basis. That is necessary just to keep the current financial data accurate. An updated on-site analysis should be performed at least every three to five years, depending on age of the development and major repair and replacement projects completed in recent years. It is the responsibility of the board of directors to follow the condominium law for reserve funds and make sure that reserve studies are completed.

Additional State Reserve Study Laws