Purpose. The purpose of a reserve fund is to repair, replace, restore, or maintain the major common area components. (Civ. Code § 5510(b); § 5565(b)(1).) The reserve study process can be simplified as follows:
- A reserve company retained by the board identifies all major common area components, the cost to repair/replace them, and their remaining life span.
- The reserve company calculates how much money is needed and when.
- The board decides how to fund the reserves--whether through increased assessment contributions, special assessments, or a combination of the two.
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The funding plan is annually disclosed to the membership in the year-end budgeting process.
Study Required. All associations, regardless of size, are required to prepare a reserve study (Civ. Code § 5550), unless the total replacement costs are less than 50% of the gross budget of the association, excluding the association’s reserve account for that period. (Civ. Code § 5550(a).)
Every Three Years. At least once every three years, the board of directors shall cause to be conducted a reasonably competent and diligent visual inspection of the accessible areas of the major components that the association is obligated to repair, replace, restore, or maintain. (Civ. Code § 5550(a).) A reserve study is not truly a "study" of the roofs, boilers, streets, etc. Instead, it is a list of the major common area components with an estimate of their remaining useful life. Reserve studies should be done by someone who specializes in reserve studies.
Elevated Structures. Even though elevated structures have a separate 9-year inspection cycle, they need to be included in the association's reserve study.
Annual Updates. The allocation of reserve items is not written in stone. Allocations are only projections and are subject to revision annually as roofs, boilers, etc. wear out at their own rates. As a result, boards must review the reserve study, or cause it to be reviewed, annually and implement appropriate adjustments to the reserve account requirements. (Civ. Code § 5550(a).)
FHA Loans. Reserves and reserve studies are also required for FHA-backed mortgages.
Small Associations. Small residential associations, even as small as two units, must perform reserve studies if they have common areas--unless the total replacement costs are less than 50% of the annual gross budget. (Civ. Code § 5550(a).)
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