The state of Colorado has adopted specific statutes related to reserve studies, which are set forth in Colorado HB-1359. While the original bill required a reserve study at least every three years, the final bill simply requires that associations adopt a governance policy with respect to reserve studies. Unfortunately, this language is rather ambiguous. Our discussions with Colorado lawyers tells us that most are recommending that associations adopt policies which specify a full reserve study every three years, with annual updates for intervening 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.
Contact the reserve study experts at Facilities Advisors, Inc. for your reserve study needs. (877) 304-6700.