State of Nevada
The state of Nevada has adopted specific statutes related to reserve studies, which are set forth in section NRS 116.31152 of the state’s civil statutes.
Those statutes generally provide that a reserve study be conducted at least every 5 years. It must be reviewed and studied annually to determine sufficient funds.
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.
Nevada Revised Statutes
NRS 116.31152 Study of reserves; duties of executive board regarding study; person who conducts study required to hold permit; contents of study; submission of summary of study to Division; use of money credited against residential construction tax for upkeep of park facilities and related improvements identified in study.
1. The executive board shall:
(a) At least once every 5 years, cause to be conducted a study of the reserves required to repair, replace and restore the major components of the common elements;
(b) At least annually, review the results of that study to determine whether those reserves are sufficient; and
(c) At least annually, make any adjustments to the association’s funding plan which the executive board deems necessary to provide adequate funding for the required reserves.
2. The study of the reserves required by subsection 1 must be conducted by a person who holds a permit issued pursuant to chapter 116A of NRS.
3. The study of the reserves must include, without limitation:
(a) A summary of an inspection of the major components of the common elements that the association is obligated to repair, replace or restore;
(b) An identification of the major components of the common elements that the association is obligated to repair, replace or restore which have a remaining useful life of less than 30 years;
(c) An estimate of the remaining useful life of each major component of the common elements identified pursuant to paragraph (b);
(d) An estimate of the cost of repair, replacement or restoration of each major component of the common elements identified pursuant to paragraph (b) during and at the end of its useful life; and
(e) An estimate of the total annual assessment that may be necessary to cover the cost of repairing, replacement or restoration of the major components of the common elements identified pursuant to paragraph (b), after subtracting the reserves of the association as of the date of the study, and an estimate of the funding plan that may be necessary to provide adequate funding for the required reserves.
4. A summary of the study of the reserves required by subsection 1 must be submitted to the Division not later than 45 days after the date that the executive board adopts the results of the study.
5. If a common-interest community was developed as part of a planned unit development pursuant to chapter 278A of NRS and is subject to an agreement with a city or county to receive credit against the amount of the residential construction tax that is imposed pursuant to NRS 278.4983 and 278.4985, the association that is organized for the common-interest community may use the money from that credit for the repair, replacement or restoration of park facilities and related improvements if:
(a) The park facilities and related improvements are identified as major components of the common elements of the association; and
(b) The association is obligated to repair, replace or restore the park facilities and related improvements in accordance with the study of the reserves required by subsection 1.
(Added to NRS by 1999, 2994; A 2003, 2241; 2005, 2606)
NRS 116.31153 Signatures required for withdrawals from reserve account of association. Money in the reserve account of an association required by paragraph (b) of subsection 2 of NRS 116.3115 may not be withdrawn without the signatures of at least two members of the executive board or the signatures of at least one member of the executive board and one officer of the association who is not a member of the executive board.
(Added to NRS by 1999, 2995)
Nevada Administrative Code
NAC 116.425 Reserve study: Contents. (NRS 116.31152, 116.615)
1. A reserve study must, in addition to the requirements set forth in NRS 116.31152, include:
(a) A copy of the component inventory from the previous reserve study if such copy was provided by the executive board to the person conducting the reserve study;
(b) A 30-year schedule which shows:
(1) The projected increase in assessments that will be required in any given year to provide an adequately funded reserve; and
(2) The projected inflation and estimated interest income from the reserve fund;
(c) The names and credentials of any consultants and other persons with expertise used to assist in the preparation of the reserve study;
(d) Any written reports prepared by consultants and other persons with expertise;
(e) If there are any conflicting recommendations of the consultants or other persons with expertise while preparing the reserve study, a written explanation as to which recommendations are selected and the reasons for their selection;
(f) The disclosures set forth in NAC 116.430; and
(g) A statement, prominently displayed, which reads substantially as follows:
The projected life expectancy of the major components and the funding needs of the reserves of the association are based upon the association performing appropriate routine and preventative maintenance for each major component. Failure to perform such maintenance can negatively impact the remaining useful life of the major components and dramatically increase the funding needs of the reserves of the association.
2. As used in this section, “adequately funded reserve” means the funds sufficient to maintain the common elements:
(a) At the level described in the governing documents and in a reserve study; and
(b) Without using the funds from the operating budget or without special assessments, except for occurrences that are a result of unforeseen catastrophic events.
(Added to NAC by Comm’n for Common-Interest Communities by R129-04, eff. 4-14-2005)
NAC 116.430 Reserve study: Required disclosures. (NRS 116.31152, 116.615) A person conducting a reserve study and any consultant assisting in the preparation of a reserve study shall include in the reserve study the following disclosures:
1. The background, training, qualifications and references that would qualify the person conducting or assisting in the preparation of the reserve study as competent to conduct or assist in the preparation of the reserve study;
2. Any relationship which could result in actual or perceived conflicts of interest;
3. Whether the person conducting or assisting in the preparation of the reserve study is bonded or has professional liability insurance;
4. The method for determining the common area components based on:
(a) An actual field inspection of the common elements with representative sampling;
(b) An inventory and material information provided by the client; or
(c) A previous reserve study and the date of that study;
5. Industry sources used for determining:
(a) The life of a major component; and
(b) The cost of repairing, replacing or restoring a major component;
6. Any guarantees, express or implied, that are given with the predictions for the cost or life expectancy of any of the major components;
7. The source of the information regarding the initial reserve fund balance presented in the reserve study; and
8. Whether a special assessment is anticipated during the time of the contracted reserve study.
(Added to NAC by Comm’n for Common-Interest Communities by R129-04, eff. 4-14-2005)
NAC 116.435 Reserve study: Dissemination of summary of results. (NRS 116.31152, 116.615) An executive board shall submit a summary of the results of the reserve study to the Commission pursuant to subsection 4 of NRS 116.31152 by filing, electronically if possible, on a form prescribed by the Division, the summary of the results of the reserve study with the Division. The Division may post the summary of the results of the reserve studies filed with the Division on its website.
(Added to NAC by Comm’n for Common-Interest Communities by R129-04, eff. 4-14-2005)
Additional State Reserve Study Laws