HomeMy WebLinkAboutagenda.council.joint.20180807
CITY COUNCIL WORK SESSION
August 07, 2018
4:00 PM, City Council Chambers
MEETING AGENDA
I. Joint Meeting with BOCC: APCHA Governance
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MEMORANDUM
TO: Mayor and Council
FROM: R. Barry Crook, Assistant City Manager
MEETING DATE: August 7, 2018
RE: Joint Meeting with the BOCC
ISSUE STATEMENT: The Board and Commissioners and City Council hold joint meetings
every quarter to discuss issues of common interest. At this joint meeting, both bodies will
have dialogue about the findings and recommendations of a joint City/County subcommittee.
BACKGROUND: APCHA was created as a multi-jurisdictional housing authority by
intergovernmental agreement (IGA) in 1982 under CRS section 29-4-201 and 29-4-501.
Under the current IGA APCHA is responsible for overseeing considerable affordable housing
assets (1654 ownership units and 1326 rental of units) developed or exacted by the City and
County. Of the current housing stock managed by APCHA it is estimated that 51% were
initiated by the City of Aspen and 49% by Pitkin County. Since the original IGA was adopted
it has undergone six revisions, which have changed the governance structures for the
authority, most recently in 2013 (see attachment A). As APCHA matures the policy and
administrative challenges of managing APCHA are increasing.
Under the 2013 IGA all APCHA staff are City employees. The Executive Director is hired by
the City Manager with input from the County Manager, and reports to the City Manager (this
responsibility has been delegated to an Assistant City Manager). Among other
responsibilities the Executive Director develops an annual work plan implemented under
direction of the City Manager, proposes guideline changes, and prepares a budget for
APCHA operations for review and approval of the City and County (who each pay 50% of
operating deficits).
APCHA has a seven member board with one alternate. Three members are appointed by
the Board of Commissioners, three members are appointed by the Aspen City Council and
one member and one alternate member are jointly appointed by both bodies. The APCHA
board responsibilities and powers include: adopting housing guideline changes (subject to
call up discussed below); hearing appeals of enforcement actions; housing advocacy;
recommending the annual work plan, affordable housing action plans and other plans to the
City or County; reviewing and making recommendations on development proposals;
assisting the Executive Director, City and County with planning, constructing, operating and
financing housing projects and other aspects of the housing program (though no capacity
currently exists within APCHA to accomplish this last function). Both the City and County
retain the authority to individually or jointly prepare a Housing Strategic Master Plan
independent of APCHA.
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The Board of Commissioners and City Council have retained ultimate housing guideline
approval through a call up provision. Both bodies have 60 days to ‘call up’ guideline changes,
which allows the City Council and Board of Commissioners to independently review any
guideline changes adopted by the APCHA Board and overturn those decisions by a simple
majority vote of either body. This is a robust system of checks and balances that ensures a
majority of the APCHA Board, City Council and Board of Commissioners independently
agree to all housing guideline changes before they take effect. A consequence of this
decision process is that when there is not agreement on a guideline change, the status quo
prevails, even when all bodies agree that a change is needed.
This occurred most recently with a proposal to change capital reserve requirements. Late in
2015 the Aspen City Council discussed the desire to formulate a policy that addresses the
understood shortfall in capital reserves across the deed-restricted APCHA HOA community.
The City of Aspen proposed guideline changes based on recommendations from the Housing
Frontiers Group (a housing policy advisory group created by the City Manager’s Office). The
City’s capital reserve proposal was presented in early 2016 at a joint meeting of the Council
and Board, and based on concerns raised by the County a subcommittee with
representatives from the City, County and APCHA was created to build consensus on a
capital reserves policy. After several meetings two alternative policy options were created,
one by the City and one by the County, but a consensus recommendation could not be
reached (see attachment B for memo comparing the two options). Both options were given
to the APCHA Board to make a recommendation back to the Board of Commissioners and
City Council. After several months the APCHA Board responded that they could not make a
recommendation on the proposed guideline changes until additional information from a data
project was available. After almost a year and half there is still no clear path for a decision
on capital reserves to be made.
The inability to build consensus on capital reserves highlighted the structural deficiencies in
the existing APCHA governance structure. Consequently the focus of the subcommittee
changed from considering capital reserves to governance. The subcommittee identified
several issues with the current governance structure, including:
• In recent years there has been less coordination between the City Council, Board of
Commissioners, APCHA Board and APCHA staff than occurred historically;
• The process to change APCHA guidelines is cumbersome, and it is too easy for
difficult policy issues to deadlock with no resolution;
• As the housing program matures there are an increasing number of difficult policy
issues that must be addressed in a timely fashion;
• The APCHA board is currently burdened with too many administrative functions or
quasi-judicial responsibilities such as enforcement appeals, land use reviews, etc., not
leaving enough time for strategy and policy work (both local and statewide legislative
issues).
It should be noted that the focus of subcommittee discussions was on governance structure.
Everyone appreciates the diligent and hard work all existing APCHA board members have
done and continue to do for the community.
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The subcommittee has developed some general concepts for amending the IGA to make the
governance structure more effective by changing the roles, responsibilities and structure of
the APCHA Board. It should be noted that outside of the recent City Council retreat, and
newspaper articles this is the first time the subcommittee’s work is being publically discussed.
The full council and board, APCHA board and staff, and the public has not had an opportunity
to weigh in on the problem definition or proposed solution. This joint meeting is the beginning
of the public dialogue on the concepts for changing the IGA and APCHA governance.
Following are some of the ideas that the City Council and Board of commissioners will have
dialogue on at this joint meeting:
Concepts of the Proposed Solution:
• Restructure the APCHA Board to include elected officials from the City and County,
and community members. The specific option discussed by the subcommittee is
to restructure the APCHA Board to include two Council Members, two
Commissioners and three community members. However, significant
conversation needs to occur about the total number of APCHA board members
and the ratio of elected officials and community members.
• The new APCHA Board will execute a work plan jointly approved by the Aspen
City Council and the Board of County Commissioners, based on a five year
strategic plan also agreed to by both bodies.
• The new APCHA Board will adopt housing guidelines, the call-up procedure
adopted in 2013 would be eliminated.
• The new APCHA Board would designate a Hearing Officer to hear enforcement
appeals and would consider appeals only under very limited circumstances.
• APCHA would continue as a city department and would be responsible for
implementing the jointly adopted strategic plan and annual work plans.
At the joint work session there will be a brief presentation of the subcommittee’s
conversations to date. At this meeting direction will be sought as to whether amendments to
the IGA creating APCHA should be developed for further consideration and if so a discussion
of the public process to vet proposed IGA revisions.
KEY DISCUSSION ITEMS:
• Is there agreement on the issues the subcommittee identified with APCHA
governance?
• Does the change in APCHA Board role make sense (more policy and less
administratively focused).
• Make up of APCHA Board, membership to include Elected Officials and community
members – what should the ratio of each be?
• Process for input of whole Board and Council to APCHA representatives, strategic
plan, annual work plan, others?
• How work plans/strategic plans will be used to provide direction for APCHA board
and City as fiscal agent.
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ATTACHMENTS:
• Attachment A - Fifth Amended and Restated Intergovernmental Agreement
Aspen/Pitkin County Housing Authority, December 2013
• Attachment B – 4/9/2017 Capital Reserve Memo from Capital Reserve Workgroup
• Attachment C – City Council Worksession Memo in re: Capital Reserve Proposal
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Attachment A
Fifth Amended and Restated Intergovernmental
Agreement Aspen/Pitkin County Housing
Authority, December 2013
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Attachment B
4/9/2017 Capital Reserve Memo from Capital
Reserve Workgroup
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MEMO
To: Capital Reserve Policy Work Group
From: Commissioners George Newman, Rachel Richards
Date: April 5, 2017; revised 4/9/2017
Subject: Pitkin County Draft Policy Recommendation
At our last Capital Reserve Policy Work Group meeting, (December 8, 2016) the group
concluded there were likely alternative policy options from the original proposal presented in
2016 to address the capital reserve gap in APCHA HOA communities. To better understand the
policy options, Pitkin County developed the alternative policy for the Capital Reserve Policy
Work Group to review and discuss.
Original Proposal (Proposal A) Alternative Proposal (Proposal B)
• APCHA Enterprise Management ($400,000)
• Capital Reserve Study ($135,000)
• HOA Education
• $10,000 grant / unit
• Grant will go into escrow account for
homeowners to go towards the capital
reserve/special assessment costs
• In exchange for grant, homeowners must
revise Deed Restrictions and HOA must revise
the Declarations
• Across all APCHA units (whether 100% deed-
restricted HOAs or mix of deed-restricted and
free-market)
• Completed within 12 months
• APCHA Enterprise Management ($400,000)
• Needs Assessment & Capital Reserve Study ($235,000)
• HOA Good Governance
o HOA Templates: ($250,000)
Templates for budgeting and Annual meetings
o Helpdesk / Legal advice: ($120,000)
o Responsible Governance Policies ($29,250)
o Licensed Association Manager – APCHA Contractor
($156,000)
o Collection of Fees
Third party collection of fees / delinquency ($TBD)
• Emergency Loans
o Up to $10,000 / unit
o No interest with 5-year payback
o Up to 20% of loan may be forgiven if HOA
demonstrates good governance through first four
years.
o In exchange to in Deed Restrictions and HOA
Declarations
• 3-4 years for 60-70% penetration • Fully implemented as policy into perpetuity of APCHA
• Costs assumptions based on first 5 years of program
• $400,000: APCHA Enterprise Management
• $235,000: Needs Assessment & Cap Reserve
• $TBD: HOA Education
• $14,630,000: Grants/unit (Based on Condo +
SF 100% Deed-Restricted Ownership)
Total Cost: $14,895,000
• $400,000: APCHA Enterprise Management
• $235,000: Needs Assessment & Cap Reserve
• $790,250: HOA Good Governance
• $3,721,679: Emergency Loans Forgiveness (20% of
worse-case HOAs in inventory, based on 2012 Capital
Reserve Study)
o $744,335 loan forgiveness
Total Cost: $2,003,081
Including full cost of loans: $4,344,404
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Note: Administrative overhead costs are not included for either proposal, but are recognized as
an additional expense to both options.
Background:
The City, County and APCHA have been grappling with how to address capital reserves in deed-
restricted HOA communities for several years now. During these early discussions, City and
County officials reiterated that public funds should only be used as a last resort and that any
taxpayer dollars to current homeowners would have to be repaid at some value (monetary or
otherwise.)
The Capital Reserve Policy Work Group convened in 2016 with representatives from City
Council, Board of County Commissioners and APCHA Board to develop policy recommendations
to address concerns about capital reserve shortfalls across the system for current and future
homeowners. Collectively, the Working Group developed the following goals:
To develop capital reserve policies that will:
• Put HOAs on a path to fund their capital needs, whether that be via capital reserves or
borrowing
• Maintain affordability and fairness in the housing program
• Maintain clear, appropriate expectations for key stakeholders (including homeowners,
HOAs, APCHA, the City and the County)
The work group brought in various attorneys to review what incentives and enforcement tools
are legally available to APCHA. The summary from the legal advisement is there are few
enforcement tools available to APCHA to implement change.
Problem Statement:
Directors serving on HOA boards have a fiduciary duty to govern their communities in a fiscally
responsible way, which includes:
• Budgeting for normal operating expenses on an annual basis;
• Making adequate contributions to the reserve fund;
• Collecting assessment delinquencies;
• Providing for the routine maintenance of the common elements; and
• Making major repairs and replacements to the common elements, which are optimally
paid for through contributions which have been made to their reserve funds.
The shortfall in capital reserves is a symptom of the governance challenge many HOAs
within the system face, particularly for the self-managed association.
The housing stock is aging. The County, the City and APCHA recognizes that the gap in capital
reserves has existed for some time and some HOAs may have a problem catching up to their
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current capital needs. The need for investment is recognized and that within Deed-Restricted
units, it is may not be possible to just increase the HOA assessment to meet capital deficits.
In addition, APCHA is unable to track any progress HOAs have made in their governance and
capital reserves, specifically since the 2012 Capital Reserve Study. There is a recognized need
that APCHA needs to be equipped to better provide high-level oversight of HOAs ability to
adequately manage the housing stock and fulfill their fiscal duties to their communities.
Goals:
Any solution should balance the preservation of current housing stock with future housing
stock availability. The goal is to provide HOAs with the tools, processes and incentives to meet
their fiduciary responsibility and close the funding gap. Any savings recognized from a policy
leverages funding available for future housing stock.
Policy Option A – Original Proposal
The original policy presented to the County sought a one-time system-wide 10,000 grant in
exchange for amendments to homeowner deed restrictions and HOA declarations. The
proposed policy recommended to implement and complete within a 12-month period.
Policy Option A Cost Estimate:
Cost / Unit # Units % APCHA
Units
Total Cost
100% Deed Restricted
Ownership – Condos
only
$10,000 899 55.8% $8,990,000
100% Deed Restricted
Ownership – Condos +
SF
$10,000 1463 90.8% $14,630,000
All Deed Restricted
Units
$10,000 1611 100.0% $16,110,000
The original proposal presented was based on the 2012 Capital Reserve Study which
represented 48% of all Deed-Restricted units. The County believes this one-size approach is
cost-prohibitive to taxpayers and inequitable to both those HOA communities that have been
addressing capital reserves as well as the rest of the community that is unable to secure
affordable housing.
Although the proposed solution seeks to remedy the shortfall in capital reserves across APCHA
communities, it does not provide the incentives for long-term, sustainable, HOA governance.
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Without addressing HOA governance, there is no assurance that future City/County Boards,
even in as little as 5 or 10 years, will be faced with a similar same problem again.
Policy Option B – Alternative Proposal
The alternative policy outlined below seeks to address areas of general agreement from the
Work Group as well as account for the unique characteristics of each APCHA community. The
alternative policy is based on a balance of incentives and disincentives to promote HOA good
governance for both current and future APCHA communities that is sustainable into perpetuity.
The policy outlined below is only based on preliminary assumptions and provides opportunities
for addressing special circumstances or evaluating other approaches.
Policy Option B is a tiered, incremental approach to address HOA governance and help reduce
the capital reserve shortfall throughout the APCHA system. The proposed policy is not a one-
time short-term solution, but rather a policy adopted by APCHA to be implemented into
perpetuity for all current and future APCHA communities. The phased approached proposed
below can be initiated at any point in the future by any APCHA community unless otherwise
noted.
1. APCHA Enterprise Management (~$400,000)
The Working Group has agreed, regardless of the approach there is a need for APCHA to
modernize its systems. APCHA is unable to keep track of any progress from HOAs due to
inadequate data management. Before any policy moves forward, APCHA needs to be
equipped with enterprise management software.
2. Needs Assessment & Capital Reserve Study
The Working Group also agreed, there is a need for a new capital reserve study to serve
as a baseline for moving forward. Policy Option B builds on this discussion and in
addition to a full capital reserve study for each HOA, proposes a Needs Assessment. A
Capital Reserve Study is a budgeting tool. A Needs Assessment can assess the overall
governance and fiscal management of the HOA. Including:
• Is the HOA Board meeting routinely?
• Is the HOA holding annual membership meetings?
• Are membership meetings being properly noticed?
• Are HOAs creating budgets on an annual basis?
• Are these budgets based upon responsible estimates for common expenses and
contributions to reserves?
• Are HOAs deferring routine maintenance they are responsible for in order to
save money?
• Do they have up to date Responsible Governance Policies in place?
• Are they meeting their fiduciary duty to act in the bests interests of their
communities and to responsibly govern the fiscal aspects of their communities?
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As an example, the statutory requirements for the Responsible Governance Policy on
Collections has changed. If an HOA does not have an updated Collections Policy, they
are unable to collect their assessments, which only perpetuates the cycle. In addition,
assessments must be based upon an annual budget for common expenses and
anticipated contributions to reserves. It is unknown how Boards set their assessments.
Is it based upon the fact that they do not want an assessment increase or they simply
are not experiences with building a budget?
Although there are economies of scale if a Needs Assessment/Capital Reserve Study are
completed system-wide at the same time, there is also a benefit to completing the
Assessments incrementally as HOAs are both ready, willing and available to participate.
(However, Need Assessment and Capital Reserve would be completed in tandem
together for each HOA). The better engagement from the HOA, the better buy-in for all
of the homeowners to act upon the recommendations and trust the assumptions, etc.
Needs Assessment / Capital Reserve Cost Estimate
Needs Assessment and Capital funding would only be available to APCHA communities
that are comprised of 100% Deed-Restricted units.
Capital
Reserve
/ HOA*
Needs
Assessment
/ HOA
Total
Cost /
HOA
#
HOAs
%
APCHA
Units
Total
Cost**
100% Deed Restricted
Ownership – Condos only $2,700 $2,000 $4,700 40 55.8% $188,000
100% Deed Restricted
Ownership – Condos + SF $2,700 $2,000 $4,700 50 90.8% $235,000
*Based on 2012 Capital Reserve Study.
**Assumes APCHA pays 100% of Needs Assessment and Capital Reserve Study. 2012, APCHA
Communities paid for 30% of cost.
Cost Considerations:
a. System-wide or piece meal
b. 100% funded or cost share (prior study was 70/30)
c. Time period – All completed within 5 years? This assumes that every HOA will be able to
update within 5 year period. Or available to any HOA into perpetuity (one-time though)
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3. HOA Good Governance Toolkit
HOA Boards have a fiduciary duty, by law, to govern responsibly. Sustainability in the
APCHA housing stock starts with HOAs governance model. Good governance includes,
but is not limited to:
• HOA declarations that require some level of funding for reserves;
• Up to date Responsible Governance Policies;
• Prepared annual budgets based upon expected common expenses;
• Contributions to reserves for the upcoming fiscal year;
• Assessments based upon the annual budget;
• Regular Board meetings and an Annual Meeting of the members;
• Registering on an annual basis with the HOA Information and Resource Center
(part of the Colorado Division of Real Estate); and
• Filing annual reports with the Colorado Secretary of State,
Policy Option B develops an HOA Good Governance Toolkit, through APCHA, to provide
professional assistance to HOAs to develop these good governance practices. The toolkit
enables every APCHA community with the tools necessary to govern effectively and
meet their fiduciary responsibility. Toolkit includes:
• HOA Best Management Templates (fillable forms)
i. Annual budget template and instructions;
ii. Template Notice for Annual Meeting to consider the proposed annual
budget;
iii. Template proxy form to utilize for Annual Meeting
iv. Checklist for consideration of proposed annual budget (This will be based
upon the Declaration for each APCHA community and whether the
community was created before, on or after July 1, 1992.) and election of
Directors.
• Helpdesk
i. Provide legal advice and direction to the boards of APCHA communities
on legal and/or management issues.
1. 1x / month in-person
2. 2-3x/month phone hotline
3. Quarterly newsletters
• Fixed and discounted fees for Responsible Governance Policies required under
Colorado law.
• Licensed Community Association Manager – APCHA contractor
(bookkeeper/CPA)
• Discounted rate for collection of fees
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i. Discounted fee to ensure that each participating APCHA community has
an updated Collections Policy in place;
ii. Discounted fee to provide a template letter for APCHA communities to
utilize which provides owners with notice of the delinquency and
opportunity for a payment plan to bring their delinquent account current,
prior to turning their account over to an attorney for legal action.
iii. Based upon economies of scale, deferred fees and/or discounted legal
fees for pursuing assessment delinquencies.
HOA Management Toolkit Cost Estimate:
The actual costs would be negotiated with the law firm handling this work for APCHA.
APCHA may cover part of the monthly fee and may also want to require that the APCHA
communities contribute a portion of this fee in order to have some skin in the game.
Cost estimate below assumes participation by all APCHA 100% deed-restricted HOAs
(Condos and single families) and 100% of costs are covered by APCHA.
Cost Occurrence Total Cost
(over 5 years)
HOA BMP Toolkit $5,000 1x / HOA $250,000
Monthly Help Desk $2,000 $24,000/year $120,000
Responsible Governance
Policies $65/document 9/HOA @
50 HOAs $29,250
Licensed Community
Association Manger –
APCHA Contractor
$30/hour 20 hours/week $156,000
Collection Fees Negotiated cost with law firm
Cost Considerations:
a) APCHA may cover 100% of costs
b) Communities and APCHA may cost-share in the costs.
c) Service provided through APCHA: If this is a service of APCHA then it would be
available to all APCHA communities. The benefit is that through using the service
the so-called sticks of the grant program would simply be an expectation of the
HelpDesk products (i.e. changing HOA decs and sharing information with
APCHA).
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4. Emergency Loans
There are four ways for an HOA to fund a capital reserves. 1) Build contributions to the
reserve fund into the annual budget, which will be funded through regular annual
assessments paid by homeowners; 2) Special Assessment; 3) Loan; or 4) combination of
these options. It is becoming much more common for even free-market HOAs to seek
loans to cover capital deficits. However, banks secure the loan through the assessment
income. If an HOA does not have a reserve study, adequate level of reserves, or collect
on its delinquencies, it is not eligible for a loan. The goal of the Policy Option B is to to
enable Deed-Restricted HOAs to be able to obtain private sector loans to close the
reserve gap.
However, after addressing the governance issues the HOA is unable to obtain a free-
market loan, or, the funding gap is too large, APCHA, through a third party, could
provide below-market (i.e zero interest) emergency loans. In exchange for a zero-
interest loan, each HOA and homeowner must agree to amend their Deed Restrictions
and HOA Declarations. Although specific amendments have not been determined,
possible amendments discussed have included:
Deed Restriction Amendments HOA Declarations Amendments
• Adherence to APCHA Guidelines as
they may change from time to time
• Changes to Appreciation caps
• Modeled after Burlingame II
• Seek professional capital reserve
study
• Share budget annually with APCHA
• Updating of Responsible Governance
Policies
•
Loans are available one-time to HOA community up to $10,000/unit (but entire HOAs
must opt into the program). Loan term is 5 years. To be eligible, the HOA must
demonstrate is has implemented good governance practices. If after the first 4 years of
the repayment, the HOA and homeowner remain in good standing and has made
progress towards its capital reserves, the HOA/homeowner may be eligible for up to
20% forgiveness of the note through either principal reduction or leveraging annual
appreciation.
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Emergency Loan Cost Example
Amount and terms of loan are only for example purposes and remain up for review by
the Working Group. If the 5 HOAs with the largest deficit from the 2012 Capital Reserve
Study (representing 10% or all APCHA Deed-Restricted HOA communities) opted into
the Emergency Loan Program and continually exhibited good governance:
Initial
HOA Deficit
Initial Unit
Deficit
Total
Units
Total Loan
Amount
Remaining
HOA Deficit
Total Amount
Forgiven
($378,585) ($18,028) 21 $210,000 ($168,585) $42,000
($289,637) ($15,244) 19 $190,000 ($99,637) $38,000
($54,475) ($13,619) 4 $40,000 ($14,475) $8,000
($1,073,822) ($12,784) 84 $840,000 ($233,822) $168,000
($68,380) ($11,397) 6 $60,000 ($8,380) $12,000
($321,176) ($10,706) 30 $300,000 ($21,176) $60,000
($304,865) ($10,162) 30 $300,000 ($4,865) $60,000
($105,049) ($9,550) 11 $105,050 $ - $21,010
($756,630) ($8,697) 87 $756,639 $ - $151,328
($117,463) ($7,831) 15 $117,465 $ - $23,493
$2,919,154 $583,831
5. Policy Changes - Ongoing
Policy Option B does not address several key policy questions the Working Group has
discussed for APCHA. The County still encourages APCHA, the City and the County to to
address these critical outstanding issues to ensure sustainability for the program.
• Affordability.
Evaluate what is affordable. Affordability should also integrate the HOA dues
into the overall Debt-to-Income ratio. But what is the right % - 30%, 355? 40%?
• Point of Sale Options.
Disincentives to underfunding capital reserves should be explored further such
as higher resale commissions required for units with underfunded Capital
Reserves, with the fees going to the needed repairs at the unit’s complex
APCHA continues to employ the POS options upon resale via Deed Restriction
Revisions. As units turn over, APCHA integrates more accountability into the
Deed Restrictions regarding HOA management and upkeep of the unit.
• Review of Mitigation Units.
Ensure that future mitigation units are inclusive of affordability. I.e. mitigation
unit is not located in a complex with high HOAs based on free-market prices.
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Attachment C
City Council Worksession Memo in re: Capital
Reserve Proposal
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MEMORANDUM
TO: Mayor and Council
FROM: Barry Crook, Assistant City Manager
DATE: April 26, 2016
MEETING DATE: May 2, 2016
RE: Public Hearing on the Capital Reserve Policy Proposals
ACTION REQUESTED
Today’s meeting was scheduled for the Council to take public testimony on the Capital R eserve Policy
proposals offered at the December 15, 2015 worksession. This meeting is solely for the purpose of hearing
from the public about capital reserves and policy solutions proposed.
BACKGROUND
The Aspen City Council has, for several years, indicated a desire to formulate a policy that addresses the
understood shortfall in capital reserves across the deed-restricted HOA community. For a long time, the policy
discussion was deferred until a “solution” could be found to the issues that confront the Centenn ial
homeowners – with those solutions informing the development of a policy for the entire community. Those
communications, which were broken off by the Centennial HOA for some period of time, have recently been
restarted as a result of a lawsuit filed by the HOA there. Council now prefers that a broad policy be developed
and adopted, with Centennial being allowed to participate under the terms of that policy.
On September 29, 2015, Council held a worksession and reviewed general terms of a proposed policy framework
for Capital Reserves in our deed restricted community of owned housing. In that worksession, we discussed four
areas of concern:
1. What is the Problem?
2. Why does the Problem exist?
3. Why is it necessary to fix the Problem?
4. Who should pay to fix the Problem?
On December 15, 2015, another worksession was held to advance the conversation about what the final policy
should look like. At that worksession, we discussed the following:
1. How much should the community invest per unit?
2. How do the stakeholders (community, current owners and future owners) pay their share?
3. What are the pathways to implementation?
I have attached the memorandum from the December 15th worksession, which contains some additional
attachments you might find interesting., as well as a copy of the September 29 th worksession memorandum.
I will briefly provide you with a version of the December 15th presentation.
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MEMORANDUM
TO: Mayor and Council
FROM: Barry Crook, Assistant City Manager
Mike Kosdrosky, APCHA Executive Director
Chris Everson, Affordable Housing Project Manager
DATE: December 11, 2015
MEETING DATE: December 15, 2015
RE: Update on Capital Reserve Policy and Discussion, Part 2
REQUEST OF COUNCIL:
Receive the update and determine if the conversation is on the right track in terms of working
towards a proposed policy solution. Begin to assess specific parts of the proposal terms.
PREVIOUS COUNCIL ACTION:
Council has, for several years, indicated a desire to formulate a policy that addresses the
understood shortfall in capital reserves across the deed-restricted HOA community. For a long
time, the policy discussion was deferred until a “solution” could be found to the issues that
confront the Centennial homeowners – with those solutions informing the development of a
policy for the entire community. Those communications, which were broken off by the
Centennial HOA for some period of time, have recently been restarted. Council now prefers that
a broad policy be developed and adopted, with Centennial being allowed to participate under
the terms of that policy.
On September 29, 2015, Council held a worksession and reviewed general terms of a proposed
policy framework for Capital Reserves in our deed restricted community of owned housing.
There were four areas covered in the last worksession:
1. What is the problem?
2. Why does the problem exist?
3. Why it is necessary to fix the problem?
4. Who pays?
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A majority of council indicated support for the general direction of having the community make
investments in individual unit reserve requirements in return for a series of agreements t hat
would work to prevent reserve deficits in the future. Council indicated a desire to delve deeper
into specific areas in the next worksession.
BACKGROUND:
In the 2011-2012 Council Top Ten Goals was an effort to conduct a review of capital reserve
issues. That resulted in an effort, partially funded through APCHA, to allow HOAs in the deed
restricted community to conduct capital reserve studies and ascertain how they needed to
address this critical need. Attachment A is the excerpt from the 2012 Housing Summit regarding
capital reserves and the results of those studies.
Attachment C is a summary of State Capital Reserve laws as of 2013. Many states have enacted
legislation dealing with community association reserve and operating funds to protect owners
from fiscal problems and financial hardship. More states may enact similar legislation as
community associations continue to gain popularity. Attachment A contains a summary of each
state reserve fund law.
Reserve Studies are required in the following states: California, Delaware, Hawaii, Nevada,
Oregon, Utah and Virginia. Washington statutorily encourages associations to have a reserve
study performed every three years unless doing so would impose an unreasonable h ardship.
In COLORADO the unit owners’ associations may adopt and amend budgets for revenues,
expenditures, and reserves and impose and collect assessments for common expenses from unit
owners. Section 38-33.3-302. There is no statutory requirement to cond uct a reserve study and
no statutory requirement to fund reserves
In the last worksession, we discussed four areas of concern:
1. What is the Problem?
2. Why does the Problem exist?
3. Why is it necessary to fix the Problem?
4. Who should pay to fix the Problem?
To recap that discussion . . .
What is the Problem?
The issue – as illustrated above – is that HOA capital reserve accounts are underfunded. There
is a conversation to be had about how much these accounts should have in cash, how much
could be left for loans, and how much could be left for on-demand cash assessments. For now
we are working on a principle that 70% of the capital reserve study amount should be held in a
reserve account. It is unlikely that all of the capital reserve study amount would be needed at
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any one point in time, and even if it is, most HOAs would have some capacity to borrow from a
lending institution or make a cash call from their owners for the remainder.
As indicated in the 2012 Housing Summit Briefing Book excerpt, underfunding of HOA capital
reserve accounts is a universal phenomenon – it is not simply people acting in a hopeful manner.
Most people would prefer to defer accumulating reserves to take care of future needs that they
may not be party to or benefit from. They are betting that nothing catastrophic will happen while
they are owners and that they can defer the expense of repairs or accumulating reserves and
pass off those costs onto the next generation of owners – all without impacting the value of their
property or the re-sale price they might command in the marketplace. Usually this bet works –
but not always.
So for our ownership workforce housing system there is – by estimation – some $15 million or
more of reserve shortfall. As we have seen at Centennial, this is a problem for the housing system
and for those who benefit from the system. It is appropriate for the City Council, the BOCC and
the APCHA Board to work together to solve this problem and get our deed-restricted housing
stock on firm footing so that it works for today’s owners and for those who will follow them
tomorrow. Both the community and the workers who purchased these units have heavily
invested in the system and need to ensure it lasts into the future.
Why Does the Problem Exist?
The problem exists because people are rational economic actors. They want to avoid current
expenses if they can and prefer to defer those expenses to the next generation of buyers who
might benefit more from those investments. They do this in the deed-restricted marketplace
and the free marketplace. There is a difference however in in the two markets – at some point
in the free marketplace, decisions made about deferring maintenance or not investing in your
property sends an economic signal to prospective purchasers that reduces the price the
marketplace puts on your property. Let the property deteriorate too much and the sales price
reflects that. Invest in the property and the marketplace reflects that decision, producing a
higher price you could command for your property.
This is seldom the reaction in the deed-restricted marketplace. The “APCHA guaranteed
maximum price” is almost always the floor, not the ceiling on the sales price. It is almost
guaranteed that if there are two or more bidders on a property, the guaranteed maximum price
will be the sales price. Our deed-restricted marketplace does not reflect a lower price for the
unit if owners fail to invest or to accumulate capital reserves. So both buyers and sellers act
rationally in terms of their economic decision-making. Any solution to the problems that exist
within the system must address the economic signals sent and the incentives for both buyers
and sellers to “do the right thing” for the future of the system.
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Why is it Necessary to Fix the Problem?
The long-term health of the workforce housing system that the community and owners have
invested in demands that capital reserves be accumulated and that proper investment in the
system be made. Too much public and private money has been invested to allow the
inappropriate price signals to continue to incentivize behavior that, while rational to those in the
system, puts in jeopardy some 1500-1600 units and millions of dollars of investment. The future
workforce and future taxpayers demand that we not shirk our responsibilities.
There is some urgency to this issue because units are changing hands on a weekly/monthly
basis where sellers are receiving full value and new owners are ending up owning the capital
deficit. The problem needs to be addressed to ensure the future viability of the system and
to ensure equity among the various stakeholders.
State law continues to evolve around condominium ownership and the responsibilities of
common owners. It already exists that state law requires HOAs to formulate a policy regarding
capital reserves; however neither law nor policy requires an HOA to actually fund capital
reserves. Many think that will change over time.
The problems with deferred maintenance or repairs from inadequate design/construction are
highlighted at the Centennial ownership units. They require some $3.5 million to repair their
buildings. Similar problems cannot be allowed to come into existence at other complexes in the
system. The cost of major reconstruction/repair must be ameliorated by prudent consideration
of reserves and investment.
The nature of the problem and the need to fix it long-term suggest that all the stakeholders in
the system – the community, current owners and future owners – must collaborate to fix the
problem and solve it for the future community of taxpayers and owners alike.
Who Pays to Fix the Problem?
There are really only three groups of people who stand to benefit from fixing the problem and
who therefore have a stake in seeing the problem fixed: the community, current owners and
future owners. They should all contribute in some fashion to finding a solution and contributing
monetarily to fixing the problem.
The Community
Taxpayers and the community have long invested in creating affordable workforce housing –
either directly through taxes paid and the subsequent development of housing stock, or through
the requirements for mitigation placed on new development. Their investment needs to be
conserved so that the benefit is preserved for future generations. Therefore it is appropriate for
the community to make an investment in existing properties and to ensure that it doesn’t have
to repeatedly continue to make that investment in the future.
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Current Owners
No one should seriously argue that current owners of property do not have a responsibility for
maintaining property they own and use. Current owners need to recognize that the cost of home
ownership includes more than mortgage, taxes and HOA dues to provide current services.
Maintaining an investment is a cost of home ownership that needs to be recognized and if
necessary required by the community who has created or caused to be created the housing
stock now in private hands.
Future Owners
In the free marketplace a future owner would pay a higher price for a well-maintained unit that
reflects a current owner’s continued investment in their property. They would pay a lesser price
for those units that do not reflect that investment. The market place would send a signal to both
buyer and seller regarding the condition of the unit – so in that sense the future buyer is
contributing to the ongoing capital investment in common areas and in the condominium
ownership areas. They often contribute a “transfer fee” of some kind at sale – a contribution
that either goes to the HOA’s capital reserve or reimburses the seller for a part of their
investment in the capital reserve account. There is no reason similar conditions cannot exist in
the deed-restricted marketplace.
We believe that any policy adopted should reflect a contribution from each of
these stakeholder groups and should reinforce the kind of marketplace dynamics
that would exist outside of the deed-restricted marketplace.
DISCUSSION:
Today’s worksession will go into more specifics about a proposed capital reserve policy,
including:
1. How much should the community invest per unit?
2. How do the stakeholders (community, current owners and future owners) pay
their share?
3. What are the pathways to implementation?
How Much Does the Community Pay as its “Share”?
Given an approach that is a combination of “carrots” and “sticks”, a consensus that the
community should contribute some funding in order to preserve the huge investment it has
already made in creating the number of deed restricted, workforce housing units it has built or
caused to be built, and that substantial changes to the deed restriction, declarations and
covenants, and housing guidelines will be part of a proposed policy change. It is appropriate that
a substantial contribution from the community is forthcoming.
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The amount that has been discussed is at a level between $5000 and $10,000 per unit. In the
2012 timeframe, the capital reserve studies completed indicated an average shortfall per unit of
some $9,484. It is the staff recommendation that the community offer $10,000 per unit to every
HOA that:
Agrees to new deed restrictions, amendments to their Declarations and Covenants,
and agrees in that new deed restriction that they will abide by the capital reserve
policy as it is amended from time to time in the Housing Guidelines where it would
reside in the future.
The agreement would be required of all units in an HOA and no unit in the HOA would
benefit unless all agreed to the new terms and conditions. The agreement and the
funds would be with and credited to the individual unit, not to the HOA.
The money would be set aside in an escrow account and accessible by the HOA for
any qualifying capital requirement, released by the APCHA when requested by the
HOA and qualified by APCHA. Ongoing accounting of capital reserve requirements
and contributions by unit would be maintained by both the HOA and APCHA so that
other aspects of the policy can be maintained.
Future contributions to this account would be governed by the terms of the policy
and would come from current owners at the time of a sale if they are not yet fully
funded as defined by the policy; AND by contributions from future owners as they
purchase their unit as governed by the terms of the policy.
How do Those Stakeholders Pay Their Share?
The Community
There is growing sense that a per unit contribution from the “community” is appropriate –
setting that dollar amount and determining what “strings” go with accepting taxpayer money
need to be determined. Today there are slightly over 1600 deed restricted ownership units – not
all of which are in an HOA that has responsibility for common ownership building elements. At
$5,000 per unit, the total requirement from government is some $7.5 to $8 million, at $10,000
per unit some $15 to $16 million (assuming every unit participates – something that may not be
forthcoming for any number of reasons).
What is meant by “community”?
There are really only a few choices about how the government would pay its share of
the funding solution:
The city could pay it all
The county could pay it all
The city and the county could each pay half of the required contribution
APCHA could pay it through the Administration Fund – which means the city and
the county would pay it on a 50%/50% basis, as the fund balance could not
absorb the money contemplated.
APCHA could pay it by using its statutory authority to ask the voters for a tax
increase. Under Colorado law, a housing authority may impose:
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a) a sale/use tax at a rate not to exceed one percent, upon every
transaction or other incident with respect to which a sales or use tax
is levied by the state, excluding the sale or use of cigarettes; or
b) an ad valorem tax at a rate not to exceed five mills on each dollar of
valuation for assessment of the taxable property within such area.
In return for accepting that contribution, we believe that a system of “carrots and sticks”
should be adopted that address the inappropriate economic signals being sent under the
current system and prevent the problem from growing or reoccurring in the future.
This might include the following:
Another 10% allowed increase in sales price (similar to the 10% increase allowed for
improvements to the interior of a unit) for investments made by an owner in the
common areas of their shared ownership. So a current owner might be able to recoup
up to their invested amount or 10% of their purchase price (whichever is lower) after
they have made that investment and improved the condition of their complex. This
would reward responsible ownership in the same way the marketplace would reward
free market owners. Considerations about how this impacts unit affordability and the
category system will have to be taken into account.
A deed restriction, declaration amendment or guideline change that says if a unit is sold
and the current owner has not met their “fully funded capital reserve” requirement, that
amount will be deducted from the sales price and credited to that unit’s contribution.
This too would mirror the economic signal sent to sellers in a free market transaction –
in that sales prices would reflect the investment made or not made.
An requirement within the sales contract for payment at the time of closing made by the
new buyer:
For example, a new buyer might be required to contribute a sum of money – say
$500 – at closing to the HOA’s capital reserve account.
And a new buyer might be required to make a payment of up to $1500 (or some
percentage of the assessment assigned to the unit – say 15%) to the seller IF, and
only if, the unit in question has fully funded their capital reserve account (which
makes the decision about what we mean by “fully funded” important to the
conversation).
The Current Owners
Current owners will have to realize that their cost of home ownership must include investment
in their property and the setting aside of funds for future capital investments. Establishing that
dollar amount and making sure current owners participate in funding repairs and capital
reserves would use some of the “carrots and sticks” approaches outlined above. Some of their
investment would be offset by a “return” of some sort for that investment from the next
generation of buyer for their property.
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Future Owners
Using some of the approaches above, future owners would contribute to the capital
reserve/common investment dilemmas outlined. They might pay slightly higher prices and/or
be required to provide more funds at closing, but would be assured that they are buying a unit
that has experienced sufficient investment so that their future use is guaranteed and that they
would not inappropriately left “holding the bag” for a failure of past owners to adequately invest
in the property.
What Are the Pathways to Implementation?
These changes can be imposed on the system via changes to:
The Housing Guidelines
Deed Restrictions
Declarations and Covenants for each HOA
Housing Guidelines
The Housing Guidelines are the major repository of housing policy for the City, the County and
the Housing Authority. They are amended from time to time by a vote of all three boards. This
requires a high degree of community consensus on the governing policies for the housing
program and is the appropriate place for those policy choices to be made and maintained.
Many of the current deed restrictions contain a reference to the controlling nature of the
Housing Guidelines, with language in the deed restriction that the Housing Guidelines are
applicable to the unit in question “as they are amended from time to time.” This language should
be in every deed restriction and contain specific reference to the Capital Reserve Policy and the
requirements for funding of capital reserves as it is identified in the Housing Guidelines. By
inserting this specific language into the deed restriction, future policy decisions will be
controlling via changes to the Housing Guidelines, not by amending each and every deed
restriction.
Deed Restrictions
Each deed restriction should be amended to refer specifically to the controlling nature of the
Housing Guidelines in general, and to the specific requirements for funding of capital reserves.
The deed restriction should refer to the responsibility of the homeowner to adequately fund
capital reserves as they are determined by the Housing Guidelines. The deed restriction should
specifically reference the ability of the APCHA to retain a portion of future sales proceeds in
order to carry out the conditions of the Capital Reserve Policy as it is amended from time to time
in the Housing Guidelines.
This simultaneous use of Housing Guidelines and Deed Restrictions would allow: (1) the APCHA
to retain a portion of a seller’s proceeds if they are not fully funded with that unit’s capital
reserve requirements in order to fully fund that unit’s contributions to capital reserves; (2) to
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permit a seller who has fully funded their capital reserve requirements to be repaid a portion of
that funding as they sell their unit to the next buyer (15% of the funded reserve for that unit, up
to $1500? – Council will need to determine the final amount); (3) permit the price of the unit to
rise – up to 10% of the purchase price – for common area investments that meet the criteria of
the Housing Guidelines Policy on Capital Reserves and Capital Investments; and (4) permit a
Capital Reserve contribution at the time of sale from a new buyer to be required ($500? – Council
would have to choose an amount).
Declarations and Covenants for each HOA
The Capital Reserve Policy would also incorporate a requirement of each HOA participating in
the program to amend their Declarations and Covenants to require the HOA to: (1) have a Capital
Reserve Study to be performed/updated by a qualified vendor every 3-5 years (Council will need
to choose a deadline) and (2) to have a funding plan that would fund the Capital Reserve Amount
to the 70% level in cash reserves within 7-10 years (Council will need to choose a deadline).
By using a combination of Deed Restrictions, Housing Guidelines, and Declarations & Covenants,
we assure the community that the community’s investment is specified for the purposes
intended and not diverted into other uses by the HOA or a current owner. It works to ensure
that the policy is enacted as intended and produces the desired outcome. It should make sure
that the community only has to make this investment ONCE, not over and over again in the
event that HOA Boards or owners fail to maintain their resolve regarding Capital Reserves. It
would alleviate concerns around court challenges under a scenario where only one of the
available tools are used to try and achieve the goals of the Capital Reserve Policy.
RECOMMENDED ACTION:
If Council believes this approach is the one they want to pursue, we can continue to put more
details together, returning for ever more in-depth policy discussions. We have considered the
impact these policy options would have on the ability of the Centennial owners to make the ir
repairs and have had conversations with their representatives. The Housing Frontier s Group has
had hours of conversations about the nature of the problem and the various pathways to
solutions. The APCHA Board has likewise considered the issues.
As council begins to provide a direction, we can return to these stakeholder groups and see what
their reaction is to staff ideas and council direction. At some point we will need to engage the
BOCC in this conversation if they are going to participate in both setting the policy and in funding
the solution.
Council should begin to affirm some of the specific details of the proposed policy so that a final
decision about the Capital Reserve Policy and its implementation can be considered by the
partners – the APCHA and the BOCC. All will have to agree with the proposed policy, will have to
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participate in the recommended changes and funding plans, and will have to adopt those changes
at their board level.
NEXT STEPS:
1. Agree on particular detail elements of the policy.
2. Draft language for Deed Restrictions, amendments for Declarations and Covenants,
language for Housing Guideline changes relative to the Capital Reserve Policy.
3. Hold meetings with BOCC and the APCHA Board on those policy elements and gain
agreement.
ATTACHMENTS:
Attachment A: Summary of Proposed Elements of the Capital Reserve Policy
Attachment B: Excerpt from 2012 Housing Summit Briefing Book on Capital Reserves
Attachment C: Summary of State Capital Reserve Laws (2013) from the Community
Associations Institute
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Attachment A
Summary of
Proposed Elements of the
Capital Reserve Policy
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Summary of Proposed Capital Reserve
Policy Features:
Item Description Needs
Approval From
Community
Responsibility
1. Invest $10,000 per unit that participates.
Agreement would be by complex HOA but
would be with every unit owner in that
complex. All owners must agree to terms
and conditions for any owner to participate.
Cost is estimated at a maximum of $16
million.
2. APCHA, on behalf of the community, will
maintain escrow accounts for every unit
participating in the program and will
disburse funds to the HOA on behalf of
every unit that satisfy the requirements for
capital investment.
3. Maintain the Capital Reserve Policy in the
Housing Guidelines.
4. Create a “Capital Reserve Refunding Policy”
in the Housing Guidelines that would allow a
fully funded unit owner to receive 15% (up
to a maximum of $1500) of his fully funded
assessment from a subsequent buyer at
closing. This payment reflects the value of a
fully funded capital reserve program and
returns some value to the seller of a unit
that has fully funded its reserve
requirement.
5. Create a “Capital Reserve Contribution
Policy” in the Housing Guidelines that
requires a $500 contribution from every
buyer of a deed restricted unit to the HOA’s
Capital Reserve at closing (or whatever
amount is set in the Housing Guidelines for
this purpose). This reflects the “ante” for a
new buyer entering the HOA community.
Aspen City
Council
Pitkin County
BOCC
APCHA Board
of Directors
HOA Boards
Unit owners
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HOA
Responsibility
1. Perform a Capital Reserve Study and update
it every 3-5 years.
2. Determine how to allocate capital reserve
contributions to each unit (by unit count,
bedroom count or square footage). Maintain
an accounting – along with APCHA staff – of
the current status of every unit towards that
assessment total.
3. Create a plan to fund with cash reserves 70%
of that study amount over a 7-10 year
horizon.
4. Submit funding requests to APCHA in
accordance with Housing Guidelines policy
for what constitutes a legitimate capital
spending request.
5. Maintain an accounting of common area
capital investments made – and gain APCHA
approval in advance of those investments –
so that APCHA may make price adjustments
in the subsequent sales price of those units
in accordance with the common area
investment policies.
6. Update Declarations and Covenants of their
respective HOA to require the Capital
Reserve Study and funding approach as
defined by the Housing Guidelines.
7. Update Declarations and Covenants of their
respective HOA to require a Capital Reserve
Contribution by all future buyers at closing
in the amount specified in the Housing
Guidelines.
8. Confirm accounting by unit for assessment
and spending with APCHA staff on an annual
basis.
Aspen City
Council
Pitkin County
BOCC
APCHA Board
of Directors
HOA Boards
Seller
Responsibility
1. Upon acceptance into the Capital Reserve
Policy Program, a seller will either fully fund
their capital reserve assessment or disgorge
the difference between the current reserve
contribution and the assessment required at
the sale of their unit.
2. Seller will request up to a 10% price
adjustment to their unit to reflect the
investments made by their HOA and their
Aspen City
Council
Pitkin County
BOCC
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contribution to capital reserve assessments.
This will be granted when the HOA has
achieved a “fully funded” status as
determined by the APCHA under the
Housing Guidelines.
3. Seller will request up to a $1500 capital
reserve payment from a subsequent buyer if
eligible under the Housing Guidelines.
APCHA Board
of Directors
HOA Boards
Unit owners
Buyer
Responsibility
1. Buyer will reimburse a seller for 15% (up to a
maximum of $1500) as a capital reserve
payment IF the buyer has fully funded the
capital reserve assessment of the unit
involved in the transaction.
2. Buyer will pay a one-time capital reserve
contribution of $500 (or whatever amount is
set by the Housing Guidelines) to the HOA at
the time of sale.
Aspen City
Council
Pitkin County
BOCC
APCHA Board
of Directors
HOA Boards
Unit owners
Unit buyers
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Attachment B
Excerpt from 2012 Housing
Summit Briefing Book
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Excerpt from Housing Summit Briefing Book
The purpose of a capital reserve fund for a condo or homeowners association is to fund and plan for
the inevitable repair and replacements costs in the common areas of a community. From roofs to
sidewalks, from shutters to gardens, repair and replacement is part of any property owner's task list.
When done properly, an audit or capital reserve study will collect information on property condition,
and project a useful life and repair and replacement costs. When projected out over a 15 or 30 year
period (allowing for inflation), a study can provide a board with a roadmap to follow for the funding,
replacement, and repair of the association's common areas.
According to the Community Associations Institute (CAI), at the end of 2009 the total amount of
money held in reserves (accumulated reserves) by all HOAs and condominiums in the U.S. is
approximately $35 billion dollars. When divided by the total number of homes within these HOAs
(24 million) we can see that the average accumulated reserves per household are a paltry $1,458!
Under a cost sharing agreement with APCHA, Capital Reserve studies for maintaining existing
housing stock are in various states of progress – some associations have rough estimates of need;
others are still compiling assessments of various capital items and continue to develop their financial
situation. However, from what data currently available, an underlying truth exists – that being there
is a shortfall in capital reserves for the affordable housing developments in Aspen and Pitkin County,
as there is for almost every HOA in the free market world.
The following table notes that of the associations already reviewed, aggregate funded status for capital
reserves stands at roughly 22%, or the equivalent shortfall of around $7.4 million. If the additional
associations and total of ~1500 units were extrapolated from those which were the subject of the
studies – and had a similar average shortfall per unit – the potential shortfall for the entire affordable
housing environment could be as large as roughly $14.2 million.
Looking at the across the distribution of associations who have participated in the study effort, first
from the perspective of the total reserves needed and the gap between current reserve amounts and
the recommendations:
Table 9
# of
Units
Starting
Capital
Reserve
Targeted
Reserve
Funded
Percent
Shortfall
per Unit
Aggregate
Capital
Shortfall
Associations
Reviewed 778 $2,050,018 $9,428,246 21.7% ($9,484) ($7,378,228)
Minimum 91 $130,000 $82,481 158% $522 $47,519
Maximum 92 $500,455 $3,301,170 15% ($30,443) ($2,800,715)
Source: Aggregated data from Housing Frontier’s as of July 2012
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You can see that the vast majority of the gaps are less than $500,000 per association. When looking
at the gap on a per unit basis the majority is less than $10,000 per unit.
What is clear is that there are a few associations who have significant (> $1 million per association,
>$20,000 per unit) funding problems to address. Of course, the shortfall above assumes reaching
full funding for replacement of all capital items – a benchmark not typically achieved by
homeowner associations whether deed restricted or free market, especially following recent
economic conditions. In fact, most homeowner associations never target a full funding scenario
but instead opt for other common threshold levels as described below:
-$3,000,000
-$2,500,000
-$2,000,000
-$1,500,000
-$1,000,000
-$500,000
$0
$500,000
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
-$35,000.00
-$30,000.00
-$25,000.00
-$20,000.00
-$15,000.00
-$10,000.00
-$5,000.00
$0.00
$5,000.00
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
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Baseline funding: Simply maintaining a positive balance in the reserve account – any amount is
sufficient, so long as the balance does not fall below zero.
Threshold funding: Similar to Baseline funding, this method targets a specific dollar amount to
maintain in reserves (other than zero).
Statutory funding: Uniquely defined by individual localities through statute, if such law exists in
the location of your property, defining a minimum necessary reserve percent.
Note that while some states prescribe specific funding requirements for HOAs in rule or law,
Colorado is not one of these – Colorado’s only requirement is to have a replacement plan
established, funding is not mandated and the reserve study may even be performed internally and
not by an independent, third party.
With multiple perspectives held by vastly different individual governing groups and the unique
circumstances and regulations surrounding each development being managed, it is ineffective to
relate the status of capital reserve funding shortfalls for Pitkin County affordable housing
developments to other groupings. Rather, given the diversity that exists, instead of focusing on the
state of the universe for current reserves, it is better to look at the implications of low reserves and
how that affects the development. It is more beneficial to focus on individual unit sales and ability
to secure lending as the basis for determining appropriate reserve levels, and given today’s
economic environment, reserve levels in the 70%-80% range appear favorable when considering
lending options and real estate transactions.
While there is a sizable gap between the desired 70%-80% benchmark and the current 22% reserve
funding percentage in affordable housing units in the Valley with governing associations, given
the number of units involved and potential to spread the shortfall over multiple years, the problem
does appear to be more manageable.
Many experts have recommended a 5-10 year plan to bring reserve levels up to the study-
recommended amounts. Using the average shortfall per unit of $9484, and assuming a 70%
target and a ten-year amortization period for all 684 units, the average temporary monthly
increase would be less than $53/month per unit (assuming a 1% interest earned).
Our HOA communities – and especially their board members – have to recognize the need to be
responsible owners and create a plan to properly fund their reserve amounts at a higher level than
is the current norm. If we look at a hypothetical Category 3 buyer of a 2-bedroom unit in 2000
who paid around $130,000 for the unit, and who, under the guidelines, could sell that unit today
for $187,000, they would have $57,000 of appreciation. How much of an investment would be
appropriate to secure that gain? It appears to be a reasonable expectation to invest $10,000 (the
average capital reserve shortfall per unit) over those 10 years ($1000 per year) to realize their gain
of $57,000, certainly the counterpart in the free market would see that as a very reasonable cost of
home ownership.
When faced with the need to make a repair and actually spend money, the following are ways that
an HOA can budget those expenditures:
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1. Reserves: If you’ve set aside reserves for the type of project you’re facing, dipping into the reserves
is an obvious option. “Unfortunately, associations aren’t reserving anywhere where they should
be,” says Lisa A. Magill, a shareholder and association attorney at Becker & Poliakoff PA in Fort
Lauderdale, Fla. “In Florida, owners can vote down the association’s funding of any reserves.
Continually, you’ll have owners who aren’t in a position to pay any assessments. So if an
association is collecting reserves, it’s usually only about 10 percent of what it should be collecting.
When projects come up, they’re either paid for by a special assessment or some other means,
usually a loan.”
2. A special assessment: A special assessment is a common fallback option for HOAs that need
money immediately and have no other or better way to raise it.
3. A loan: “An institutional loan usually entails pledging as collateral the HOA’s lien rights in terms
of collecting assessments,” says Andrew Lewis of Eisinger, Brown, Lewis, Frankel & Chaiet PA
in Hollywood, Fla., who specializes in representing community associations. “Lenders look at all
kinds of factors when considering HOA loans,” explains Magill. “Are you capitalized? Do you
have reserves? What’s your percentage of delinquencies? What other maintenance items have to
be performed? For example, with the loan, are you funding only one of 10 projects that need to be
done? They also look to make sure you have all the appropriate insurance, which associations
should have, anyway, but sometimes don’t. But really, the delinquency rate is the most important
thing. Some lenders won’t approve a loan if your HOA has 7 -8 percent delinquencies, but the
benchmark is 15 percent.” In our conversations with local lenders, they indicate they are making
these loans and are willing to make these loans to deed restricted HOAs.
Obviously, a combination of these three options is the most likely way that our deed restricted
communities will fund major maintenance/repair work, given the general condition of their capital
reserves.
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Attachment C
Summary of
State Capital Reserve Laws
(2013) from the
Community Associations
Institute
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Summary of State Reserve Fund Laws
(September 2013)
Many states have enacted legislation dealing with community association reserve and operating funds to
protect owners from fiscal problems and financial hardship. More states may enact similar legislation as
community associations continue to gain popularity. The following is a summary of each state reserve
fund law.
Reserve Studies are required in the following states: California, Delaware, Hawaii, Nevada, Oregon, Utah
and Virginia. Washington statutorily encourages associations to have a reserve study performed every
three years unless doing so would impose an unreasonable hardship.
Please remember that community associations are governed by state law, which can vary widely from
state to state. This information is intended for general educational and informational purposes only; it
may not reflect the most recent developments, and it may contain errors or omissions. The publisher
does not warrant or guarantee that the information contained here complies with applicable law of any
given state. It is not intended to be a substitute for advice from a lawyer, community manager,
accountant, insurance agent, reserve professional, lender, or any other professional.
ALABAMA
The unit owners’ associations may adopt and amend budgets for revenues, expenditures and reserves
and impose and collect assessments for common expenses from unit owners. Section 35-8A-302(2).
Sellers must present buyers with an offering statement of the amount, or a statement that there is no
amount, included in the budget as a reserve for repairs and replacement, and a statement of any other
reserves. Section 35-8A-403(5).
There is no statutory requirement to conduct a reserve study and no statutory requirement to fund
reserves.
ALASKA
The unit owners’ associations may adopt and amend budgets for revenues, expenditures, and reserves
and impose and collect assessments for common expenses from unit owners. Section 34.08.320(2). A
public offering statement must include assumptions concerning the calculation of the amount of reserves
certified by a certified architect or engineer; the amount included in the budget as a reserve for repairs
and replacement including the estimated cost of repair or replacement cost and the estimated useful life
of the asset to be repaired or replaced; and a statement of any other reserves. Section
34.08.530(5).
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There is no statutory requirement to conduct a reserve study and no statutory requirement to fund
reserves.
ARIZONA
For condominiums, unit owners’ associations may adopt and amend budgets for revenues,
expenditures, and reserves and impose and collect assessments for common expenses from unit
owners. Section 33-1242(2). The resale disclosure statement must include the total amount of money
held by the association as reserves. The purchaser must also receive a copy of the most recent reserve
study of the association, if any. Section 33-1260.
For planned communities, resale disclosure statement must include the total amount of money held by
the association as reserves. The purchaser must also receive a copy of the most recent reserve study of
the community, if any. Section 33-1806.
There is no statutory requirement to conduct a reserve study and no statutory requirement to fund
reserves.
Section 10-3830 requires directors of nonprofit corporations to discharged duties in good faith, with the
care an ordinarily prudent person in a like position would exercise under similar circumstances, and in a
manner the director reasonably believes to be in the best interests of the corporation.
ARKANSAS
There is no statutory requirement to conduct a reserve study and no statutory requirement to fund
reserves.
CALIFORNIA
On a quarterly basis common interest development boards of directors must review reserve accounts
and compare reserves to the previous year. At least once every three years, boards must conduct a
competent and diligent visual inspection of the property that the association is obligated to repair,
replace restore or maintain as part of a study of the reserve account requirements. The board is to
annually review this study to consider and implement necessary adjustments to the board’s analysis of
the reserve account requirements. See more detailed information in California Civil Code Sections 1365
and 1365.5.
COLORADO
The unit owners’ associations may adopt and amend budgets for revenues, expenditures, and reserves
and impose and collect assessments for common expenses from unit owners. Section 38-33.3-302.
There is no statutory requirement to conduct a reserve study and no statutory requirement to fund
reserves.
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CONNECTICUT
Condominium associations shall provide in the proposed budget for the condominium adequate reserves
for capital expenditures. Section 47-88e. Common interest community executive boards, at least
annually, shall adopt a proposed budget for the common interest community for consideration by the
unit owners. Not later than thirty days after the adoption of a proposed budget, the executive board
shall provide to all unit owners a summary of the budget, including a statement of the amount of any
reserves, and a statement of the basis on which such reserves are calculated and funded. Section 47-
261e. Resale disclosure statement must include the total amount of money held by the association as
reserves. Section 47-264(5).
There is no statutory requirement to conduct a reserve study.
DELAWARE
Condominiums must contain within their declaration provisions that mandate that the association
create and maintain, in addition to any reserve for contingencies, a fully funded repair and replacement
reserve based upon a current reserve study. Section 81-205(14). Condominium disclosure statement
must include the current balance in reserves and the most recent reserve study. Section 84-409.
DISTRICT OF COLUMBIA
The unit owners’ associations may adopt and amend budgets for revenues, expenditures, and reserves
and impose and collect assessments for common expenses from unit owners. Section 42-1903.08.
Disclosure statement shall include the amount, or a statement that there is no amount, included in the
projected budget as a reserve for repairs and replacement. Section 42-1904.04.
There is no statutory requirement to conduct a reserve study and no statutory requirement to fund
reserves.
FLORIDA
Condominium financial reporting rules must include, but not be limited to, standards for presenting a
summary of association reserves, including a good faith estimate disclosing the annual amount of
reserve funds that would be necessary for the association to fully fund reserves for each reserve item
based on the straight-line accounting method. Section 718-111(13). Annual budgets shall include
reserve accounts for items such as, but not limited to, roof replacement, pavement, painting and other
items with a replacement cost exceeding $10,000. Funding for the accounts can be waived by a majority
vote at a duly called meeting. Section 718.112(f)(2).
Homeowner associations may adopt a budget that includes reserve accounts for capital expenditures
and deferred maintenance for which the association is responsible. If reserve accounts are not
established, funding of such reserves is limited to the extent that the governing documents limit
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increases in assessments, including reserves. Associations may waive reserves with proper notification in
their financial statement. Section 720.303(6).
There is no statutory requirement to conduct a reserve study and no statutory requirement to fund
reserves.
GEORGIA
Condominium resale disclosure statement must include the estimated or actual operating budget for
the condominium for the current year’s reserves. Section 44-3-111.
There is no statutory requirement to conduct a reserve study and no statutory requirement to fund
reserves.
HAWAII
Condominium budgets shall include the amount of money in reserve, future reserve estimates based on
a reserve study performed by the association, an explanation of how reserves are computed and the
amount to be collected for reserves in the year ahead. The association shall compute the estimated
replacement reserves by a formula that is based on the estimated life and the estimated capital
expenditure or major maintenance required for each part of the property. The estimated replacement
reserves shall include: adjustments for revenues which will be received and expenditures which will be
made before the beginning of the fiscal year to which the budget relates; and separate, designated
reserves for each part of the property for which capital expenditures or major maintenance will exceed
$10,000. Parts of the property for which capital expenditures or major maintenance will not exceed
$10,000 may be aggregated in a single designated reserve. Section 514B-148.
IDAHO
There is no statutory requirement to conduct a reserve study and no statutory requirement to fund
reserves.
ILLINOIS
The Common Interest Community Act requires the board to give each owner a copy of the proposed
annual budget which shall provide for reasonable reserves for capital expenditures and deferred
maintenance for repair or replacement of the common elements. 765 ILCS 160/1-45.
The Condominium Act requires the board of managers to adopt a budget that provides for reasonable
reserves for capital expenditures and differed maintenance for repair or replacement of the common
elements. To determine the amount of reserves appropriate, the board shall take into consideration the
any independent professional reserve study which the association may obtain. Any association without a
reserve requirement in its condominium instruments may elect to waive in whole or in part the reserve
requirements by a vote of 2/3 of the total votes of the association. 760 ILCS 605/9.
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Disclosure statement shall include a statement of the status and amount of any reserve or replacement
fund and any other fund specifically designated for association projects.
There is no statutory requirement to conduct a reserve study.
INDIANA
All sums assessed by the association of co-owners shall be established by using generally accepted
accounting principles applied on a consistent basis and shall include the establishment and maintenance
of a replacement reserve fund. The replacement reserve fund may be used for capital expenditures and
replacement and repair of the common areas and facilities and may not be used for usual and ordinary
repair expenses of the common areas and facilities. Section 32-25-4-4.
There is no statutory requirement to conduct a reserve study.
IOWA
There is no statutory requirement to conduct a reserve study and no statutory requirement to fund
reserves.
KANSAS
There is no statutory requirement to conduct a reserve study and no statutory requirement to fund
reserves.
KENTUCKY
The Horizontal Property Law requires all co-owners to contribute toward the expense of maintaining a
replacement reserve fund for repairs and maintenance of the general common elements. Section
381.870.
Condominium unit owners’ associations may adopt and amend budgets for revenues, expenditures, and
reserves and impose and collect assessments for common expenses from unit owners. Section
981.9167. The resale disclosure statement must include the total amount of any reserves for capital
expenditures, if any, and of any portions of those reserves designated by the association for any
specified projects. Section 381.9203.
There is no statutory requirement to conduct a reserve study.
LOUISIANA
Associations may adopt and amend budgets for revenues, expenditures, and reserves and make and
collect assessments for common expenses from unit owners. Section 9:1123.102. Public offering
statements shall include an indication of the amount, or a statement that there is no amount, included
in the budget as a reserve for repairs and replacement. Section 9:1124.102.
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There is no statutory requirement to conduct a reserve study and no statutory requirement to fund
reserves.
MAINE
Unit owners associations may adopt and amend budgets for revenues, expenditures and reserves and
collect assessments for common expenses from unit owners. Section 1603-102. Public offering
statements must contain a statement of the amount, or a statement that there is no amount, included
in the budget as a reserve for repairs and replacement and a statement of the amount and purpose of
any other reserves. Section 1604-103.
There is no statutory requirement to conduct a reserve study and no statutory requirement to fund
reserves.
MARYLAND
Councils of unit owners have the power to adopt and amend budgets for revenue, expenditures, and
reserves and collect assessments for common expenses from unit owners. Section 11-109. The level of
reserves is required to be included in the annual budget; however, there is not a required level of
reserve funding. Section 11-109.2. Resale certificate must contain the current operating budget of the
condominium including details concerning the reserve fund for repair and replacement and its intended
use, or a statement that there is no reserve fund. Section 11-1350
There is no statutory requirement to conduct a reserve study and no statutory requirement to fund
reserves.
MASSACHUSETTS
All condominiums shall be required to maintain an adequate replacement reserve fund, collected as part
of the common expenses and deposited in an account or accounts separate and segregated from
operating funds. Section 183A-10(i). Managing agents shall be responsible for rendering, in no case less
frequently than quarterly, a written report to the trustees or the managing board of the organization of
unit owners detailing all receipts and expenditures on behalf of the organization, including beginning
and ending balances and copies of all relevant bank statements and reconciliations for the replacement
reserve fund, and maintain a separate and distinct account for the replacement reserve fund. Section
183A-10(f).
There is no statutory requirement to conduct a reserve study.
MICHIGAN
Condominiums must have a reserve fund for major repairs and replacement of common elements shall
be maintained by the associations of co-owners. The administrator may by rule establish minimum
standards for reserve funds. Section 559.205.
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The state administrative code requires the co-owners’ association to maintain a reserve fund which, at a
minimum, shall be equal to 10% of the association’s current annual budget on a noncumulative basis.
The funds shall only be used for major repairs and replacement of common elements. Additionally, the
following statement shall be contained in the bylaws: “The minimum standard required by this section
may prove to be inadequate for a particular project. The association of co-owners should carefully
analyze their condominium project to determine if a greater amount should be set aside, or if additional
reserve funds should be established for other purposes.” Rule 559.511.
There is no statutory requirement to conduct a reserve study.
MINNESOTA
The common interest ownership act requires an association to include in its annual budgets
replacement reserves projected by the board to be adequate, together with past and future
contributions to replacement reserves, to fund the replacement of common elements. The act also
requires the association to reevaluate the adequacy of its budgeted replacement reserves at least every
third year after the recording of the declaration creating the common interest community. Section
515B.3-1441. Unit owners associations have the power to adopt and amend budgets for revenues,
expenditures and reserves and collect assessments for common expenses from unit owners. Section
515B.3-101. Communities must distribute an annual report with a statement of t he asso ciation's total
r eplacement rese rves , t he co m po nent s of t he commo n i nte re st comm unity f o r wh ich the
re se rv es are set aside, and th e amo unts o f th e reser ves , if a ny, that t he board ha s allocated for
t he replacem ent o f eac h o f t h ose c o m ponent s. Sec t io n 515 B.3 -1 06. D isclo sure statem e nt s m us t
include the amount i n t he budget as r e plac e ment re se rv es and a st atem ent o f a ny o th er
r es erve s.
There is no statutory requirement to conduct a formal reserve study.
MISSISSIPPI
There is no statutory requirement to conduct a reserve study and no statutory requirement to fund
reserves.
MISSOURI
Unit owners associations may adopt and amend budgets for revenues, expenditures, and reserves and
collect assessments for common expenses from unit owners. Section 448.3-102.1. Resale certificates
must provide the amount of any reserves for capital expenditures and of any portions of those reserves
designated by the association for any specified projects. Section 448.4 -109.1.
There is no statutory requirement to conduct a reserve study and no statutory requirement to fund
reserves.
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MONTANA
There is no statutory requirement to conduct a reserve study and no statutory requirement to fund
reserves.
NEBRASKA
Unit owners associations may adopt and amend budgets for revenues, expenditures, and reserves and
collect assessments for common expenses from unit owners. Section 76-860.
There is no statutory requirement to conduct a reserve study and no statutory requirement to fund
reserves.
NEVADA
The common interest ownership act requires an association to establish adequate reserves, funded on a
reasonable basis, for the repair, replacement and restoration of the major components of the common
elements. Section 116.3115. Additionally, the executive board of an association is required to conduct a
study of reserves at least every five years, review the study to determine if reserves are sufficient, and
adjust reserves, if necessary. The statute specifies how the study is to be conducted. Section 116.31152.
A public offering statement must include a budget which has a statement of the amount included in the
budget as reserves. Section 116.4103.
NEW HAMPSHIRE
Public offering statement must include the status and amount of any reserve for the major maintenance
or replacement fund and any portion of such fund earmarked for any specified project by the board of
directors. Section 356-B:58.
NEW JERSEY
The association may levy and collect assessments duly made by the association for a share of common
expenses or otherwise, including any other moneys duly owed the association, upon proper notice to
the appropriate unit owner, together with interest thereon, late fees and reasonable attorneys' fees, if
authorized by the master deed or bylaws. All funds collected by an association shall be maintained
separately in the association's name. For investment purposes only, reserve funds may be commingled
with operating funds of the association. Commingled operating and reserve funds shall be accounted for
separately, and a commingled account shall not, at any time, be less than the amount identified as
reserve funds. Section 46:8B-15.
There is no statutory requirement to conduct a reserve study and no statutory requirement to fund
reserves.
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NEW MEXICO
Unit owners of a condominium association may adopt and amend budgets for revenues, expenditures,
and reserves and collect assessments for common expenses from unit owners. Section 47-7C-2.
Disclosure statements must make a statement of the amount or a statement that there is no amount
included in the budget as a reserve for repairs and replacement and a statement of any other reserves.
Section 47-7D-3 and 47-7E.
There is no statutory requirement to conduct a reserve study and no statutory requirement to fund
reserves.
NEW YORK
Condominium bylaws may contain provisions governing the payment, collection and disbursement of
funds, including reserves, to provide for major and minor maintenance, repairs, additions,
improvements, replacements, working capital, bad debts and unpaid common expenses, depreciation,
obsolescence and similar purposes. RRP Section 339-V. Co-operative corporation directors must
periodically set aside reasonable sums for reserves. CCO Section 72.
There is no statutory requirement to conduct a reserve study.
NORTH CAROLINA
Unit owners associations may adopt and amend budgets for revenues, expenditures, and reserves and
collect assessments for common expenses from unit owners. Section 47C-3-102 and 47F-3-102. Public
offering statements must include the amount, or a statement that there is no amount, included in the
budget as a reserve for repairs and replacement and a statement of any other reserves. Section 47C-4-
103.
There is no statutory requirement to conduct a reserve study and no statutory requirement to fund
reserves.
NORTH DAKOTA
There is no statutory requirement to conduct a reserve study and no statutory requirement to fund
reserves.
OHIO
Unless otherwise provided in the declaration or bylaws, the condominium unit owners association,
through the board of directors, shall 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 10% 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
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association. Section 5311.081.
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Planned community owners associations, unless otherwise provided in the declaration or bylaws,
through its board of directors, shall annually adopt and amend an estimated budget for revenues and
expenditures. Any budget shall include reserves in an amount adequate to repair and replace major
capital items in the normal course of operations without the necessity of special assessments, unless the
owners, exercising not less than a majority of the voting power of the owners association, waive the
reserve requirement annually. Section 5312.06.
There is no statutory requirement to conduct a reserve study.
OKLAHOMA
There is no statutory requirement to conduct a reserve study and no statutory requirement to fund
reserves.
OREGON
The declarant, on behalf of a homeowners association, shall conduct an initial reserve study, prepare an
initial maintenance plan and establish a reserve account. A reserve account shall be established to fund
major maintenance, repair or replacement of all items of common property which will normally require
major maintenance, repair or replacement, in whole or in part, in more than one and less than 30 years.
The board of directors of the association annually shall conduct a reserve study or review and update an
existing study to determine the reserve account requirements. After review of the reserve study or
reserve study update, the board of directors may, without any action by owners adjust the amount of
payments as indicated by the study or update and provide for other reserve items that the board of
directors, in its discretion, may deem appropriate. Section 94.595 and 100.175. Following a turnover of
power from the declarant to the association, the board of directors at least annually shall adopt a
budget for the planned community and include moneys to be allocated to the reserve account. Section
94.645 and 100.412. However, the board of directors, with the approval of all owners, may elect not to
fund the reserve account for the following year. Section 94.595 and 100.175.
PENNSYLVANIA
Unit owners associations may adopt and amend budgets for revenues, expenditures, and reserves and
collect assessments for common expenses from unit owners. Section 3302 and 5302. Disclosure
statements must statement of the amount or a statement that there is no amount included in the
budget as a reserve for repairs and replacement and a statement of any other reserves. Section 3402
and 5402.
There is no statutory requirement to conduct a reserve study and no statutory requirement to fund
reserves.
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RHODE ISLAND
Unit owners associations may adopt and amend budgets for revenues, expenditures, and reserves and
collect assessments for common expenses from unit owners. Section34-36.1-3.02. Public offering
statements for condominiums must disclose a budget detailing the amount of reserves sufficient for
painting exterior surfaces, replacing roofing, resurfacing roadways or other items subject to declaration.
Must also disclose itemized life spans for common elements and expected impact on assessments.
Section 34-36.1-4.03.
There is no statutory requirement to conduct a reserve study.
SOUTH CAROLINA
There is no statutory requirement to conduct a reserve study and no statutory requirement to fund
reserves.
SOUTH DAKOTA
There is no statutory requirement to conduct a reserve study and no statutory requirement to fund
reserves.
TENNESSEE
Unit owners associations may adopt and amend budgets for revenues, expenditures, and reserves and
collect assessments for common expenses from unit owners. Section 66-27-402. Disclosure statements
must include the amount, or a statement that there is no amount, included in the budget as a reserve
for repairs and replacements, and whether or not any study has been done to determine their
adequacy, if a study has been done, where the study will be made available for review and inspection,
and a statement of any other reserves. Section 66-27-503.
There is no statutory requirement to conduct a reserve study and no statutory requirement to fund
reserves.
TEXAS
Unit owners associations may adopt and amend budgets for revenues, expenditures, and reserves and
collect assessments for common expenses from unit owners. Section 82.102. Resale statements must
include the amount of reserves, if any, for capital expenditures and of portions of those reserves
designated by the association for a specified project. Section 82.157.
There is no statutory requirement to conduct a reserve study and no statutory requirement to fund
reserves.
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UTAH
Condominium management committees must cause a reserve analysis to be conducted no less
frequently than every six years and review and, if necessary, update a previously conducted reserve
analysis no less frequently than every three years. The management committee may conduct a reserve
analysis itself or may engage a reliable person or organization, as determined by the management
committee, to conduct the reserve analysis. An association of unit owners shall annually present the
reserve study and provide an opportunity for unit owners to discuss reserves and to vote on whether to
fund a reserve fund and, if so, how to fund it and in what amount. Section 57-8-7.5 and 57-8a-211.
There is no statutory requirement to fund reserves.
VERMONT
Unit owners associations may adopt and amend budgets for revenues, expenditures, and reserves and
collect assessments for common expenses from unit owners. Section 27A-3-102. Public offering
statement must include the amount, or a statement that there is no amount, included in the budget as a
reserve for repairs and replacement and statement of any other reserves. Section 27A-4-103.
There is no statutory requirement to conduct a reserve study and no statutory requirement to fund
reserves.
VIRGINIA
Associations must conduct a reserve study at least once every five years to determine the necessity and
amount of reserves required to repair, replace and restore the common elements or capital
components. The board of directors must review the study at least annually and make adjustments as
the board determines to keep the funding of reserves sufficient. The statutory provisions on reserves
also include requirements for the contents of the association budget if reserves are determined to be a
necessity. Section 55-79.83.1 and 55-514.1. Resale certificates must include the current reserve study
report or a summary thereof, a statement of the status and amount of any reserve or replacement fund
and any portion of the fund designated for any specified project by the association. Section 55-79.97.
WASHINGTON
Unit owners associations may adopt and amend budgets for revenues, expenditures, and reserves and
collect assessments for common expenses from unit owners, and establish and administer a reserve
account and prepare a reserve study. Section 64.34.304 and 64.38.020. The decisions relating to the
preparation and updating of a reserve study must be made by the board of directors of the association in
the exercise of the reasonable discretion of the board. Such decisions must include whether a reserve
study will be prepared or updated, and whether the assistance of a reserve study professional will be
utilized. Section 64.34.388. Associations are encouraged to establish a reserve account to fund major
maintenance, repair, and replacement of common elements, including limited common elements that
will require major maintenance, repair, or replacement within 30 years. Unless doing so would impose
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an unreasonable hardship, an association with significant assets shall prepare and update a reserve
study. The initial reserve study must be based upon a visual site inspection conducted by a reserve study
professional. Unless doing so would impose an unreasonable hardship, the association shall update the
reserve study annually. At least every three years, an updated reserve study must be prepared and
based upon a visual site inspection conducted by a reserve study professional. Section 64.34.380 and
64.38.065. The public offering statement shall include copies of the association's current reserve study,
if any. If the association does not have a reserve study, the public offering statement shall contain the
following disclosure: “This association does not have a current reserve study. The lack of a current
reserve study poses certain risks to you, the purchaser. Insufficient reserves may, under some
circumstances, require you to pay on demand as a special assessment your share of common expenses
for the cost of major maintenance, repair, or replacement of a common element.” Section 64.34.410.
WEST VIRGINIA
Unit owners associations may adopt and amend budgets for revenues, expenditures, and reserves and
collect assessments for common expenses from unit owners. Section 36B-3-102. Public offering
statement must include the amount, or a statement that there is no amount, included in the budget as a
reserve for repairs and replacement and statement of any other reserves. Section 36B-4-103.
There is no statutory requirement to conduct a reserve study and no statutory requirement to fund
reserves.
WISCONSIN
An association may, with the written consent of a majority of the unit votes, create or terminate a
statutory reserve account. Section 703.163.
There is no statutory requirement to conduct a reserve study and no statutory requirement to fund
reserves.
WYOMING
There is no statutory requirement to conduct a reserve study and no statutory requirement to fund
reserves.
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MEMORANDUM
TO: Mayor and Council
FROM: Barry Crook, Assistant City Manager
Mike Kosdrosky, APCHA Executive Director
Chris Everson, Affordable Housing Project Manager
DATE: September 25, 2015
MEETING DATE: September 29, 2015
RE: Update on Capital Reserve Policy and Discussion
REQUEST OF COUNCIL:
Receive the update and determine if the conversation is on the right track in terms of working
towards a proposed policy solution.
PREVIOUS COUNCIL ACTION:
Council has for several years indicated a desire to formulate a policy that addresses the
understood shortfall in capital reserves across the deed-restricted HOA community. For a long
time, the policy discussion was deferred until a “solution” could be found to the issues that
confront the Centennial homeowners – with those solutions informing the development of a
policy for the entire community. Those communications, which were broken off by the
Centennial HOA for some period of time, have recently been restarted. Council now prefers that
a broad policy be developed and adopted, with Centennial being allowed to participate under
the terms of that policy.
BACKGROUND:
In the 2011-2012 Council Top Ten Goals was an effort to conduct a review of capital reserve
issues. That resulted in an effort partially funded through APCHA to allow HOAs in the deed
restricted community to conduct capital reserve studies and ascertain how they needed to
address this critical need. Provided in Attachment A is the excerpt from the 2012 Housing Summit
regarding capital reserves and the results of those studies.
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State Reserve Fund Laws (September 2013)
Many states have enacted legislation dealing with community association reserve and operating
funds to protect owners from fiscal problems and financial hardship. More states may enact
similar legislation as community associations continue to gain popularity. Attachment A contains
a summary of each state reserve fund law.
Reserve Studies are required in the following states: California, Delaware, Hawaii, Nevada,
Oregon, Utah and Virginia. Washington statutorily encourages associations to have a reserve
study performed every three years unless doing so would impose an unreasonable hardship.
COLORADO
The unit owners’ associations may adopt and amend budgets for revenues, expenditures, and
reserves and impose and collect assessments for common expenses from unit owners. Section
38-33.3-302.
There is no statutory requirement to conduct a reserve study and no statutory requirement to
fund reserves
DISCUSSION:
There are four areas we wish to cover today and two more we will list, but want to defer to a
more in-depth discussion:
1. What is the problem?
2. Why does the problem exist?
3. Why it is necessary to fix the problem?
4. Who pays?
And in brief – with detailed discussion for another worksession:
5. How do those stakeholders pay their share?
6. What are the pathways to implementation?
What is the Problem?
The issue – as illustrated above – is that HOA capital reserve accounts are underfunded. There
is a conversation to be had about how much these accounts should have in cash, how much
could be left for loans, and how much could be left for on-demand cash assessments – but for
now we are working on a principle that 70% of the capital reserve study amount should be held
in a reserve account. It is unlikely that all of the capital reserve study amount would be needed
at any one point in time, and even if it is, most HOAs would have some capacity to borrow from
a lending institution or make a cash call from their owners for the remainder.
As indicated in the 2012 Housing Summit Briefing Book excerpt, underfunding of HOA capital
reserve accounts is a universal phenomenon – it is not simply people acting in a hopeful manner.
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Most people would prefer to defer accumulating reserves to take care of future needs that they
may not be party to or benefit from. They are betting that nothing catastrophic will happen while
they are owners and that they can defer the expense of repairs or accumulating reserves and
pass off those costs onto the next generation of owners – all without impacting the value of their
property or the re-sale price they might command in the marketplace. Usually this bet works –
but not always.
So for our system there is – by estimation – some $15 million or more of reserve shortfall. As we
have seen at Centennial, this is a problem for the housing system and for those how benefit from
the system. It is appropriate for the City Council, the BOCC and the APCHA Board to work
together to solve this problem and get our deed-restricted housing stock on firm footing so that
it works for today’s owners and for those who will follow them tomorrow. Both the community
and the workers who purchased these units have heavily invested in the system and need to
ensure it lasts into the future.
There is some urgency to this issue because units are changing hands on a weekly/monthly
basis where sellers are receiving full value and new owners are ending up owning the capital
deficit. The problem needs to be addressed to ensure the future viability of the system and
to ensure equity among the various stakeholders.
Why Does the Problem Exist?
The problem exists because people are rational economic actors. They want to avoid current
expenses if they can and prefer to defer those expenses to the next generation of buyers who
might benefit more from those investments. They do this in the deed-restricted marketplace
and the free marketplace. There is a difference however in in the two markets – at some point
in the free marketplace, decisions made about deferring maintenance or not investing in your
property sends an economic signal to prospective purchasers that reduces the price the
marketplace puts on your property. Let the property deteriorate too much and the sales price
reflects that. Invest in the property and the marketplace reflects that decision into a higher price
you could command for your property.
This is seldom the reaction in the deed-restricted marketplace. The “APCHA guaranteed
maximum price” is almost always the floor, not the ceiling on the sales price. It is almost
guaranteed that if there are two or more bidders on a property, the guaranteed maximum price
will be the sales price. Our deed-restricted marketplace does not reflect a lower price for the
unit if owners fail to invest or to accumulate capital reserves. So both buyers and sellers act
rationally in terms of their economic decision-making. Any solution to the problems that exist
within the system must address the economic signals sent and the incentives for both buyers
and sellers to “do the right thing” for the future of the system.
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Why is it Necessary to Fix the Problem?
The long-term health of the workforce housing system that the community and owners have
invested in demands that capital reserves be accumulated and that proper investment in the
system be made. Too much public and private money has been invested to allow the
inappropriate price signals to continue to incentivize behavior that, while rational to those in the
system, puts in jeopardy some 1500 units and millions of investment. The future workforce and
future taxpayers demand that we not shirk our responsibilities.
State law continues to evolve around condominium ownership and the responsibilities of
common owners. It already exists that state law requires HOAs to formulate a policy regarding
capital reserves – however neither law nor policy requires an HOA to actually fund capital
reserves. Many think that will change over time.
The problems with deferred maintenance or repairs from inadequate design/construction are
highlighted at the Centennial ownership units. They require some $3.5 million to repair their
buildings. Similar problems cannot be allowed to come into existence at other complexes in the
system – the cost of major reconstruction/repair must be ameliorated by prudent consideration
of reserves and investment.
The nature of the problem and the need to fix it long-term suggest that all the stakeholders in
the system – the community, current owners and future owners – must collaborate to fix the
problem and solve it for the future community of taxpayers and owners alike.
Who Pays to Fix the Problem?
There are really only three groups of people who stand to benefit from fixing the problem and
who therefore have a stake in seeing the problem fixed. They should all contribute in some
fashion to finding a solution and contributing monetarily to fixing the problem.
The Community
Taxpayers and the community have long invested in creating affordable workforce housing –
either directly through taxes paid and the subsequent development of housing stock, or through
the requirements for mitigation placed on development that then develop that workforce
housing. Their investment needs to be conserved so that the benefit is preserved for future
generations. Therefore it is appropriate for the community to make an investment in existing
properties and to ensure that it doesn’t have to repeatedly continue to make that investment in
the future.
Current Owners
No one should seriously argue that current owners of property do not have a responsibility for
maintaining property they own and use. Current owners need to recognize that the cost of home
ownership includes more than mortgage, taxes and HOA dues to provide current services.
Maintaining an investment is a cost of home ownership that needs to be recognized and if
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necessary required by the community who has created or caused to be created the housing
stock now in private hands.
Future Owners
In the free marketplace a future owner would pay a higher price for a well-maintained unit that
reflects a current owner’s continued investment in their property. They would pay a lesser price
for those units that do not reflect that investment. The market place would send a signal to both
buyer and seller regarding the condition of the unit – so in that sense the future buyer is
contributing to the ongoing capital investment in common areas and in the condominium
ownership areas. They often contribute a “transfer fee” of some kind at sale – a contribution
that either goes to the HOA’s capital reserve of reimburses the seller for a part of their
investment in the capital reserve account. There is no reason similar conditions cannot exist in
the deed-restricted marketplace.
We believe that any policy adopted should reflect a contribution from each of these stakeholder
groups and should reinforce the kind of marketplace dynamics that would exist outside of the
deed-restricted marketplace.
Council might want to defer the following areas of discussion for another time
and place – but I wanted to outline some of the issues associated with the policy
considerations you will have to decide.
How do Those Stakeholders Pay Their Share?
The Community
There is growing sense that a per unit contribution from the “community” is appropriate –
setting that dollar amount and determining what “strings” go with accepting taxpayer money
need to be determined. So the city council and the other partnering bodies will have to
determine what that amount is and how to raise that contribution.
What is meant by “community”?
There are really only a few choices about how the government would pay its share of
the funding solution:
The city could pay it all
The county could pay it all
The city and the county could each pay half of the required contribution
APCHA could pay it through the Administration Fund – which means the city and
the county would pay it on a 50%/50% basis, as the fund balance could not
absorb the money contemplated.
APCHA could pay it by using its statutory authority to ask the voters for a tax
increase. Under Colorado law, a housing authority may impose:
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a) a sale/use tax at a rate not to exceed one percent, upon every
transaction or other incident with respect to which a sales or use tax
is levied by the state, excluding the sale or use of cigarettes; or
b) an ad valorem tax at a rate not to exceed five mills on each dollar of
valuation for assessment of the taxable property within such area.
In return for accepting that contribution, we believe that a system of “carrots and sticks” should
be adopted that address the inappropriate economic signals being sent under the current
system and prevent the problem from growing or reoccurring in the future.
The Current Owners
Current owners will have to realize that their cost of home ownership must include investment
in their property and the setting aside of funds for future capital investments. Establishing that
dollar amount and making sure current owners participate in funding repairs and capital
reserves would use some of the “carrots and sticks” approaches outlined above. Some of their
investment would be offset by a “return” of some sort for that investment from the next
generation of buyer for their property.
Future Owners
Using some of the approaches above, future owners would contribute to the capital
reserve/common investment dilemmas outlined. They might pay slightly higher prices and/or
be required to provide more funds at closing, but would be assured that they are buying a unit
that has experiences sufficient investment so that their future use is guaranteed and that they
would not inappropriately left “holding the bag” for a failure of past owners to adequately invest
in the property.
What Are the Pathways to Implementation?
These changes can be imposed on the system via changes to:
The Housing Guidelines
Deed Restrictions
Declarations and Covenants for each HOA
How long each of these pathways take, the legal footing the governments (city, county, APCHA)
might have to impose these changes, and the pushback from each approach is something that
will have to be considered before choosing a pathway to follow – or choosing a combination of
each.
RECOMMENDED ACTION:
If Council believes this approach is the one they want to pursue, we can continue to put more
and more details together, returning for more in-depth policy discussions. We have held focus
groups with some HOA Board Presidents, had conversations with the Housing Frontiers Group,
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and discussed internally the various options for several years now. We have considered the
impact these policy options would have on the ability of the Centennial owners to make their
repairs and have had conversations with their representatives. The Housing Frontiers Group has
had hours and hours of conversations about the nature of the problem and the various pathways
to solutions. The APCHA Board has likewise considered the issues.
As council begins to provide a direction, we can return to these stakeholder groups and see what
their reaction is to staff ideas and council direction. At some point we will need to engage the
BOCC in this conversation if they are going to participate in both setting the policy and in funding
the solution.
Attachment A: Excerpt from 2012 Housing Summit Briefing Book on Capital Reserves
Attachment B: Summary of State Capital Reserve Laws (2013) from the Community
Associations Institute
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Attachment A
Excerpt from Housing Summit Briefing Book
The purpose of a capital reserve fund for a condo or homeowners association is to fund and plan for
the inevitable repair and replacements costs in the common areas of a community. From roofs to
sidewalks, from shutters to gardens, repair and replacement is part of any property owner's task list.
When done properly, an audit or capital reserve study will collect information on property condition,
and project a useful life and repair and replacement costs. When projected out over a 15 or 30 year
period (allowing for inflation), a study can provide a board with a roadmap to follow for the funding,
replacement, and repair of the association's common areas.
According to the Community Associations Institute (CAI), at the end of 2009 the total amount of
money held in reserves (accumulated reserves) by all HOAs and condominiums in the U.S. is
approximately $35 billion dollars. When divided by the total number of homes within these HOAs
(24 million) we can see that the average accumulated reserves per household are a paltry $1,458!
Under a cost sharing agreement with APCHA, Capital Reserve studies for maintaining existing
housing stock are in various states of progress – some associations have rough estimates of need;
others are still compiling assessments of various capital items and continue to develop their financial
situation. However, from what data currently available, an underlying truth exists – that being there
is a shortfall in capital reserves for the affordable housing developments in Aspen and Pitkin County,
as there is for almost every HOA in the free market world.
The following table notes that of the associations already reviewed, aggregate funded status for capital
reserves stands at roughly 22%, or the equivalent shortfall of around $7.4 million. If the additional
associations and total of ~1500 units were extrapolated from those which were the subject of the
studies – and had a similar average shortfall per unit – the potential shortfall for the entire affordable
housing environment could be as large as roughly $14.2 million.
Table 9
# of
Units
Starting
Capital
Reserve
Targeted
Reserve
Funded
Percent
Shortfall
per Unit
Aggregate
Capital
Shortfall
Associations
Reviewed 778 $2,050,018 $9,428,246 21.7% ($9,484) ($7,378,228)
Minimum 91 $130,000 $82,481 158% $522 $47,519
Maximum 92 $500,455 $3,301,170 15% ($30,443) ($2,800,715)
Source: Aggregated data from Housing Frontier’s as of July 2012
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Looking at the across the distribution of associations who have participated in the study effort, first
from the perspective of the total reserves needed and the gap between current reserve amounts and
the recommendations:
You can see that the vast majority of the gaps are less than $500,000 per association. When looking
at the gap on a per unit basis the majority is less than $10,000 per unit.
What is clear is that there are a few associations who have significant (> $1 million per association,
>$20,000 per unit) funding problems to address. Of course, the shortfall above assumes reaching
-$3,000,000
-$2,500,000
-$2,000,000
-$1,500,000
-$1,000,000
-$500,000
$0
$500,000
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
-$35,000.00
-$30,000.00
-$25,000.00
-$20,000.00
-$15,000.00
-$10,000.00
-$5,000.00
$0.00
$5,000.00
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
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full funding for replacement of all capital items – a benchmark not typically achieved by
homeowner associations whether deed restricted or free market, especially following recent
economic conditions. In fact, most homeowner associations never target a full funding scenario
but instead opt for other common threshold levels as described below:
Baseline funding: Simply maintaining a positive balance in the reserve account – any amount is
sufficient, so long as the balance does not fall below zero.
Threshold funding: Similar to Baseline funding, this method targets a specific dollar amount to
maintain in reserves (other than zero).
Statutory funding: Uniquely defined by individual localities through statute, if such law exists in
the location of your property, defining a minimum necessary reserve percent.
Note that while some states prescribe specific funding requirements for HOAs in rule or law,
Colorado is not one of these – Colorado’s only requirement is to have a replacement plan
established, funding is not mandated and the reserve study may even be performed internally and
not by an independent, third party.
With multiple perspectives held by vastly different individual governing groups and the unique
circumstances and regulations surrounding each development being managed, it is ineffective to
relate the status of capital reserve funding shortfalls for Pitkin County affordable housing
developments to other groupings. Rather, given the diversity that exists, instead of focusing on the
state of the universe for current reserves, it is better to look at the implications of low reserves and
how that affects the development. It is more beneficial to focus on individual unit sales and ability
to secure lending as the basis for determining appropriate reserve levels, and given today’s
economic environment, reserve levels in the 70%-80% range appear favorable when considering
lending options and real estate transactions.
While there is a sizable gap between the desired 70%-80% benchmark and the current 22% reserve
funding percentage in affordable housing units in the Valley with governing associations, given
the number of units involved and potential to spread the shortfall over multiple years, the problem
does appear to be more manageable.
Many experts have recommended a 5-10 year plan to bring reserve levels up to the study-
recommended amounts. Using the average shortfall per unit of $9484, and assuming a 70%
target and a ten-year amortization period for all 684 units, the average temporary monthly
increase would be less than $53/month per unit (assuming a 1% interest earned).
Our HOA communities – and especially their board members – have to recognize the need to be
responsible owners and create a plan to properly fund their reserve amounts at a higher level than
is the current norm. If we look at a hypothetical Category 3 buyer of a 2-bedroom unit in 2000
who paid around $130,000 for the unit, and who, under the guidelines, could sell that unit today
for $187,000, they would have $57,000 of appreciation. How much of an investment would be
appropriate to secure that gain? It appears to be a reasonable expectation to invest $10,000 (the
average capital reserve shortfall per unit) over those 10 years ($1000 per year) to realize their gain
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of $57,000, certainly the counterpart in the free market would see that as a very reasonable cost of
home ownership.
When faced with the need to make a repair and actually spend money, the following are ways that
an HOA can budget those expenditures:
1. Reserves: If you’ve set aside reserves for the type of project you’re facing, dipping into the reserves
is an obvious option. “Unfortunately, associations aren’t reserving anywhere where they should
be,” says Lisa A. Magill, a shareholder and association attorney at Becker & Poliakoff PA in Fort
Lauderdale, Fla. “In Florida, owners can vote down the association’s funding of any reserves.
Continually, you’ll have owners who aren’t in a position to pay any assessments. So if an
association is collecting reserves, it’s usually only about 10 percent of what it should be collecting.
When projects come up, they’re either paid for by a special assessment or some other means,
usually a loan.”
2. A special assessment: A special assessment is a common fallback option for HOAs that need
money immediately and have no other or better way to raise it.
3. A loan: “An institutional loan usually entails pledging as collateral the HOA’s lien rights in terms
of collecting assessments,” says Andrew Lewis of Eisinger, Brown, Lewis, Frankel & Chaiet PA
in Hollywood, Fla., who specializes in representing community associations. “Lenders look at all
kinds of factors when considering HOA loans,” explains Magill. “Are you capitalized? Do you
have reserves? What’s your percentage of delinquencies? What other maintenance items have to
be performed? For example, with the loan, are you funding only one of 10 projects that need to be
done? They also look to make sure you have all the appropriate insurance, which associations
should have, anyway, but sometimes don’t. But really, the delinquency rate is the most important
thing. Some lenders won’t approve a loan if your HOA has 7 -8 percent delinquencies, but the
benchmark is 15 percent.” In our conversations with local lenders, they indicate they are making
these loans and are willing to make these loans to deed restricted HOAs.
Obviously, a combination of these three options is the most likely way that our deed restricted
communities will fund major maintenance/repair work, given the general condition of their capital
reserves.
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Attachment B
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Community Associations Institute (CAI) | 6402 Arlington Blvd., Ste 500, Falls Church, VA 22042 | www.caionline.org | (888) 224-4321
Summary of State Reserve Fund Laws
(September 2013)
Many states have enacted legislation dealing with community association reserve and operating funds to
protect owners from fiscal problems and financial hardship. More states may enact similar legislation as
community associations continue to gain popularity. The following is a summary of each state reserve
fund law.
Reserve Studies are required in the following states: California, Delaware, Hawaii, Nevada, Oregon, Utah
and Virginia. Washington statutorily encourages associations to have a reserve study performed every
three years unless doing so would impose an unreasonable hardship.
Please remember that community associations are governed by state law, which can vary widely from
state to state. This information is intended for general educational and informational purposes only; it
may not reflect the most recent developments, and it may contain errors or omissions. The publisher
does not warrant or guarantee that the information contained here complies with applicable law of any
given state. It is not intended to be a substitute for advice from a lawyer, community manager,
accountant, insurance agent, reserve professional, lender, or any other professional.
ALABAMA
The unit owners’ associations may adopt and amend budgets for revenues, expenditures and reserves
and impose and collect assessments for common expenses from unit owners. Section 35-8A-302(2).
Sellers must present buyers with an offering statement of the amount, or a statement that there is no
amount, included in the budget as a reserve for repairs and replacement, and a statement of any other
reserves. Section 35-8A-403(5).
There is no statutory requirement to conduct a reserve study and no statutory requirement to fund
reserves.
ALASKA
The unit owners’ associations may adopt and amend budgets for revenues, expenditures, and reserves
and impose and collect assessments for common expenses from unit owners. Section 34.08.320(2). A
public offering statement must include assumptions concerning the calculation of the amount of reserves
certified by a certified architect or engineer; the amount included in the budget as a reserve for repairs
and replacement including the estimated cost of repair or replacement cost and the estimated useful life
of the asset to be repaired or replaced; and a statement of any other reserves. Section
34.08.530(5).
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There is no statutory requirement to conduct a reserve study and no statutory requirement to fund
reserves.
ARIZONA
For condominiums, unit owners’ associations may adopt and amend budgets for revenues,
expenditures, and reserves and impose and collect assessments for common expenses from unit
owners. Section 33-1242(2). The resale disclosure statement must include the total amount of money
held by the association as reserves. The purchaser must also receive a copy of the most recent reserve
study of the association, if any. Section 33-1260.
For planned communities, resale disclosure statement must include the total amount of money held by
the association as reserves. The purchaser must also receive a copy of the most recent reserve study of
the community, if any. Section 33-1806.
There is no statutory requirement to conduct a reserve study and no statutory requirement to fund
reserves.
Section 10-3830 requires directors of nonprofit corporations to discharged duties in good faith, with the
care an ordinarily prudent person in a like position would exercise under similar circumstances, and in a
manner the director reasonably believes to be in the best interests of the corporation.
ARKANSAS
There is no statutory requirement to conduct a reserve study and no statutory requirement to fund
reserves.
CALIFORNIA
On a quarterly basis common interest development boards of directors must review reserve accounts
and compare reserves to the previous year. At least once every three years, boards must conduct a
competent and diligent visual inspection of the property that the association is obligated to repair,
replace restore or maintain as part of a study of the reserve account requirements. The board is to
annually review this study to consider and implement necessary adjustments to the board’s analysis of
the reserve account requirements. See more detailed information in California Civil Code Sections 1365
and 1365.5.
COLORADO
The unit owners’ associations may adopt and amend budgets for revenues, expenditures, and reserves
and impose and collect assessments for common expenses from unit owners. Section 38-33.3-302.
There is no statutory requirement to conduct a reserve study and no statutory requirement to fund
reserves.
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CONNECTICUT
Condominium associations shall provide in the proposed budget for the condominium adequate reserves
for capital expenditures. Section 47-88e. Common interest community executive boards, at least
annually, shall adopt a proposed budget for the common interest community for consideration by the
unit owners. Not later than thirty days after the adoption of a proposed budget, the executive board
shall provide to all unit owners a summary of the budget, including a statement of the amount of any
reserves, and a statement of the basis on which such reserves are calculated and funded. Section 47-
261e. Resale disclosure statement must include the total amount of money held by the association as
reserves. Section 47-264(5).
There is no statutory requirement to conduct a reserve study.
DELAWARE
Condominiums must contain within their declaration provisions that mandate that the association
create and maintain, in addition to any reserve for contingencies, a fully funded repair and replacement
reserve based upon a current reserve study. Section 81-205(14). Condominium disclosure statement
must include the current balance in reserves and the most recent reserve study. Section 84-409.
DISTRICT OF COLUMBIA
The unit owners’ associations may adopt and amend budgets for revenues, expenditures, and reserves
and impose and collect assessments for common expenses from unit owners. Section 42-1903.08.
Disclosure statement shall include the amount, or a statement that there is no amount, included in the
projected budget as a reserve for repairs and replacement. Section 42-1904.04.
There is no statutory requirement to conduct a reserve study and no statutory requirement to fund
reserves.
FLORIDA
Condominium financial reporting rules must include, but not be limited to, standards for presenting a
summary of association reserves, including a good faith estimate disclosing the annual amount of
reserve funds that would be necessary for the association to fully fund reserves for each reserve item
based on the straight-line accounting method. Section 718-111(13). Annual budgets shall include
reserve accounts for items such as, but not limited to, roof replacement, pavement, painting and other
items with a replacement cost exceeding $10,000. Funding for the accounts can be waived by a majority
vote at a duly called meeting. Section 718.112(f)(2).
Homeowner associations may adopt a budget that includes reserve accounts for capital expenditures
and deferred maintenance for which the association is responsible. If reserve accounts are not
established, funding of such reserves is limited to the extent that the governing documents limit
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increases in assessments, including reserves. Associations may waive reserves with proper notification in
their financial statement. Section 720.303(6).
There is no statutory requirement to conduct a reserve study and no statutory requirement to fund
reserves.
GEORGIA
Condominium resale disclosure statement must include the estimated or actual operating budget for
the condominium for the current year’s reserves. Section 44-3-111.
There is no statutory requirement to conduct a reserve study and no statutory requirement to fund
reserves.
HAWAII
Condominium budgets shall include the amount of money in reserve, future reserve estimates based on
a reserve study performed by the association, an explanation of how reserves are computed and the
amount to be collected for reserves in the year ahead. The association shall compute the estimated
replacement reserves by a formula that is based on the estimated life and the estimated capital
expenditure or major maintenance required for each part of the property. The estimated replacement
reserves shall include: adjustments for revenues which will be received and expenditures which will be
made before the beginning of the fiscal year to which the budget relates; and separate, designated
reserves for each part of the property for which capital expenditures or major maintenance will exceed
$10,000. Parts of the property for which capital expenditures or major maintenance will not exceed
$10,000 may be aggregated in a single designated reserve. Section 514B-148.
IDAHO
There is no statutory requirement to conduct a reserve study and no statutory requirement to fund
reserves.
ILLINOIS
The Common Interest Community Act requires the board to give each owner a copy of the proposed
annual budget which shall provide for reasonable reserves for capital expenditures and deferred
maintenance for repair or replacement of the common elements. 765 ILCS 160/1-45.
The Condominium Act requires the board of managers to adopt a budget that provides for reasonable
reserves for capital expenditures and differed maintenance for repair or replacement of the common
elements. To determine the amount of reserves appropriate, the board shall take into consideration the
any independent professional reserve study which the association may obtain. Any association without a
reserve requirement in its condominium instruments may elect to waive in whole or in part the reserve
requirements by a vote of 2/3 of the total votes of the association. 760 ILCS 605/9.
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Disclosure statement shall include a statement of the status and amount of any reserve or replacement
fund and any other fund specifically designated for association projects.
There is no statutory requirement to conduct a reserve study.
INDIANA
All sums assessed by the association of co-owners shall be established by using generally accepted
accounting principles applied on a consistent basis and shall include the establishment and maintenance
of a replacement reserve fund. The replacement reserve fund may be used for capital expenditures and
replacement and repair of the common areas and facilities and may not be used for usual and ordinary
repair expenses of the common areas and facilities. Section 32-25-4-4.
There is no statutory requirement to conduct a reserve study.
IOWA
There is no statutory requirement to conduct a reserve study and no statutory requirement to fund
reserves.
KANSAS
There is no statutory requirement to conduct a reserve study and no statutory requirement to fund
reserves.
KENTUCKY
The Horizontal Property Law requires all co-owners to contribute toward the expense of maintaining a
replacement reserve fund for repairs and maintenance of the general common elements. Section
381.870.
Condominium unit owners’ associations may adopt and amend budgets for revenues, expenditures, and
reserves and impose and collect assessments for common expenses from unit owners. Section
981.9167. The resale disclosure statement must include the total amount of any reserves for capital
expenditures, if any, and of any portions of those reserves designated by the association for any
specified projects. Section 381.9203.
There is no statutory requirement to conduct a reserve study.
LOUISIANA
Associations may adopt and amend budgets for revenues, expenditures, and reserves and make and
collect assessments for common expenses from unit owners. Section 9:1123.102. Public offering
statements shall include an indication of the amount, or a statement that there is no amount, included
in the budget as a reserve for repairs and replacement. Section 9:1124.102.
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There is no statutory requirement to conduct a reserve study and no statutory requirement to fund
reserves.
MAINE
Unit owners associations may adopt and amend budgets for revenues, expenditures and reserves and
collect assessments for common expenses from unit owners. Section 1603-102. Public offering
statements must contain a statement of the amount, or a statement that there is no amount, included
in the budget as a reserve for repairs and replacement and a statement of the amount and purpose of
any other reserves. Section 1604-103.
There is no statutory requirement to conduct a reserve study and no statutory requirement to fund
reserves.
MARYLAND
Councils of unit owners have the power to adopt and amend budgets for revenue, expenditures, and
reserves and collect assessments for common expenses from unit owners. Section 11-109. The level of
reserves is required to be included in the annual budget; however, there is not a required level of
reserve funding. Section 11-109.2. Resale certificate must contain the current operating budget of the
condominium including details concerning the reserve fund for repair and replacement and its intended
use, or a statement that there is no reserve fund. Section 11-1350
There is no statutory requirement to conduct a reserve study and no statutory requirement to fund
reserves.
MASSACHUSETTS
All condominiums shall be required to maintain an adequate replacement reserve fund, collected as part
of the common expenses and deposited in an account or accounts separate and segregated from
operating funds. Section 183A-10(i). Managing agents shall be responsible for rendering, in no case less
frequently than quarterly, a written report to the trustees or the managing board of the organization of
unit owners detailing all receipts and expenditures on behalf of the organization, including beginning
and ending balances and copies of all relevant bank statements and reconciliations for the replacement
reserve fund, and maintain a separate and distinct account for the replacement reserve fund. Section
183A-10(f).
There is no statutory requirement to conduct a reserve study.
MICHIGAN
Condominiums must have a reserve fund for major repairs and replacement of common elements shall
be maintained by the associations of co-owners. The administrator may by rule establish minimum
standards for reserve funds. Section 559.205.
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The state administrative code requires the co-owners’ association to maintain a reserve fund which, at a
minimum, shall be equal to 10% of the association’s current annual budget on a noncumulative basis.
The funds shall only be used for major repairs and replacement of common elements. Additionally, the
following statement shall be contained in the bylaws: “The minimum standard required by this section
may prove to be inadequate for a particular project. The association of co-owners should carefully
analyze their condominium project to determine if a greater amount should be set aside, or if additional
reserve funds should be established for other purposes.” Rule 559.511.
There is no statutory requirement to conduct a reserve study.
MINNESOTA
The common interest ownership act requires an association to include in its annual budgets
replacement reserves projected by the board to be adequate, together with past and future
contributions to replacement reserves, to fund the replacement of common elements. The act also
requires the association to reevaluate the adequacy of its budgeted replacement reserves at least every
third year after the recording of the declaration creating the common interest community. Section
515B.3-1441. Unit owners associations have the power to adopt and amend budgets for revenues,
expenditures and reserves and collect assessments for common expenses from unit owners. Section
515B.3-101. Communities must distribute an annual report with a statement of t he asso ciation's total
r eplacement rese rves , t he co m po nent s of t he commo n i nte re st comm unity f o r wh ich the
re se rv es are set aside, and th e amo unts o f th e reser ves , if a ny, that t he board ha s allocated for
t he replacem ent o f eac h o f t h ose c o m ponent s. Sec t io n 515 B.3 -1 06. D isclo sure statem e nt s m us t
include the amount i n t he budget as r e plac e ment re se rv es and a st atem ent o f a ny o th er
r es erve s.
There is no statutory requirement to conduct a formal reserve study.
MISSISSIPPI
There is no statutory requirement to conduct a reserve study and no statutory requirement to fund
reserves.
MISSOURI
Unit owners associations may adopt and amend budgets for revenues, expenditures, and reserves and
collect assessments for common expenses from unit owners. Section 448.3-102.1. Resale certificates
must provide the amount of any reserves for capital expenditures and of any portions of those reserves
designated by the association for any specified projects. Section 448.4 -109.1.
There is no statutory requirement to conduct a reserve study and no statutory requirement to fund
reserves.
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MONTANA
There is no statutory requirement to conduct a reserve study and no statutory requirement to fund
reserves.
NEBRASKA
Unit owners associations may adopt and amend budgets for revenues, expenditures, and reserves and
collect assessments for common expenses from unit owners. Section 76-860.
There is no statutory requirement to conduct a reserve study and no statutory requirement to fund
reserves.
NEVADA
The common interest ownership act requires an association to establish adequate reserves, funded on a
reasonable basis, for the repair, replacement and restoration of the major components of the common
elements. Section 116.3115. Additionally, the executive board of an association is required to conduct a
study of reserves at least every five years, review the study to determine if reserves are sufficient, and
adjust reserves, if necessary. The statute specifies how the study is to be conducted. Section 116.31152.
A public offering statement must include a budget which has a statement of the amount included in the
budget as reserves. Section 116.4103.
NEW HAMPSHIRE
Public offering statement must include the status and amount of any reserve for the major maintenance
or replacement fund and any portion of such fund earmarked for any specified project by the board of
directors. Section 356-B:58.
NEW JERSEY
The association may levy and collect assessments duly made by the association for a share of common
expenses or otherwise, including any other moneys duly owed the association, upon proper notice to
the appropriate unit owner, together with interest thereon, late fees and reasonable attorneys' fees, if
authorized by the master deed or bylaws. All funds collected by an association shall be maintained
separately in the association's name. For investment purposes only, reserve funds may be commingled
with operating funds of the association. Commingled operating and reserve funds shall be accounted for
separately, and a commingled account shall not, at any time, be less than the amount identified as
reserve funds. Section 46:8B-15.
There is no statutory requirement to conduct a reserve study and no statutory requirement to fund
reserves.
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NEW MEXICO
Unit owners of a condominium association may adopt and amend budgets for revenues, expenditures,
and reserves and collect assessments for common expenses from unit owners. Section 47-7C-2.
Disclosure statements must make a statement of the amount or a statement that there is no amount
included in the budget as a reserve for repairs and replacement and a statement of any other reserves.
Section 47-7D-3 and 47-7E.
There is no statutory requirement to conduct a reserve study and no statutory requirement to fund
reserves.
NEW YORK
Condominium bylaws may contain provisions governing the payment, collection and disbursement of
funds, including reserves, to provide for major and minor maintenance, repairs, additions,
improvements, replacements, working capital, bad debts and unpaid common expenses, depreciation,
obsolescence and similar purposes. RRP Section 339-V. Co-operative corporation directors must
periodically set aside reasonable sums for reserves. CCO Section 72.
There is no statutory requirement to conduct a reserve study.
NORTH CAROLINA
Unit owners associations may adopt and amend budgets for revenues, expenditures, and reserves and
collect assessments for common expenses from unit owners. Section 47C-3-102 and 47F-3-102. Public
offering statements must include the amount, or a statement that there is no amount, included in the
budget as a reserve for repairs and replacement and a statement of any other reserves. Section 47C-4-
103.
There is no statutory requirement to conduct a reserve study and no statutory requirement to fund
reserves.
NORTH DAKOTA
There is no statutory requirement to conduct a reserve study and no statutory requirement to fund
reserves.
OHIO
Unless otherwise provided in the declaration or bylaws, the condominium unit owners association,
through the board of directors, shall 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 10% 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
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association. Section 5311.081.
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Planned community owners associations, unless otherwise provided in the declaration or bylaws,
through its board of directors, shall annually adopt and amend an estimated budget for revenues and
expenditures. Any budget shall include reserves in an amount adequate to repair and replace major
capital items in the normal course of operations without the necessity of special assessments, unless the
owners, exercising not less than a majority of the voting power of the owners association, waive the
reserve requirement annually. Section 5312.06.
There is no statutory requirement to conduct a reserve study.
OKLAHOMA
There is no statutory requirement to conduct a reserve study and no statutory requirement to fund
reserves.
OREGON
The declarant, on behalf of a homeowners association, shall conduct an initial reserve study, prepare an
initial maintenance plan and establish a reserve account. A reserve account shall be established to fund
major maintenance, repair or replacement of all items of common property which will normally require
major maintenance, repair or replacement, in whole or in part, in more than one and less than 30 years.
The board of directors of the association annually shall conduct a reserve study or review and update an
existing study to determine the reserve account requirements. After review of the reserve study or
reserve study update, the board of directors may, without any action by owners adjust the amount of
payments as indicated by the study or update and provide for other reserve items that the board of
directors, in its discretion, may deem appropriate. Section 94.595 and 100.175. Following a turnover of
power from the declarant to the association, the board of directors at least annually shall adopt a
budget for the planned community and include moneys to be allocated to the reserve account. Section
94.645 and 100.412. However, the board of directors, with the approval of all owners, may elect not to
fund the reserve account for the following year. Section 94.595 and 100.175.
PENNSYLVANIA
Unit owners associations may adopt and amend budgets for revenues, expenditures, and reserves and
collect assessments for common expenses from unit owners. Section 3302 and 5302. Disclosure
statements must statement of the amount or a statement that there is no amount included in the
budget as a reserve for repairs and replacement and a statement of any other reserves. Section 3402
and 5402.
There is no statutory requirement to conduct a reserve study and no statutory requirement to fund
reserves.
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RHODE ISLAND
Unit owners associations may adopt and amend budgets for revenues, expenditures, and reserves and
collect assessments for common expenses from unit owners. Section34-36.1-3.02. Public offering
statements for condominiums must disclose a budget detailing the amount of reserves sufficient for
painting exterior surfaces, replacing roofing, resurfacing roadways or other items subject to declaration.
Must also disclose itemized life spans for common elements and expected impact on assessments.
Section 34-36.1-4.03.
There is no statutory requirement to conduct a reserve study.
SOUTH CAROLINA
There is no statutory requirement to conduct a reserve study and no statutory requirement to fund
reserves.
SOUTH DAKOTA
There is no statutory requirement to conduct a reserve study and no statutory requirement to fund
reserves.
TENNESSEE
Unit owners associations may adopt and amend budgets for revenues, expenditures, and reserves and
collect assessments for common expenses from unit owners. Section 66-27-402. Disclosure statements
must include the amount, or a statement that there is no amount, included in the budget as a reserve
for repairs and replacements, and whether or not any study has been done to determine their
adequacy, if a study has been done, where the study will be made available for review and inspection,
and a statement of any other reserves. Section 66-27-503.
There is no statutory requirement to conduct a reserve study and no statutory requirement to fund
reserves.
TEXAS
Unit owners associations may adopt and amend budgets for revenues, expenditures, and reserves and
collect assessments for common expenses from unit owners. Section 82.102. Resale statements must
include the amount of reserves, if any, for capital expenditures and of portions of those reserves
designated by the association for a specified project. Section 82.157.
There is no statutory requirement to conduct a reserve study and no statutory requirement to fund
reserves.
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UTAH
Condominium management committees must cause a reserve analysis to be conducted no less
frequently than every six years and review and, if necessary, update a previously conducted reserve
analysis no less frequently than every three years. The management committee may conduct a reserve
analysis itself or may engage a reliable person or organization, as determined by the management
committee, to conduct the reserve analysis. An association of unit owners shall annually present the
reserve study and provide an opportunity for unit owners to discuss reserves and to vote on whether to
fund a reserve fund and, if so, how to fund it and in what amount. Section 57-8-7.5 and 57-8a-211.
There is no statutory requirement to fund reserves.
VERMONT
Unit owners associations may adopt and amend budgets for revenues, expenditures, and reserves and
collect assessments for common expenses from unit owners. Section 27A-3-102. Public offering
statement must include the amount, or a statement that there is no amount, included in the budget as a
reserve for repairs and replacement and statement of any other reserves. Section 27A-4-103.
There is no statutory requirement to conduct a reserve study and no statutory requirement to fund
reserves.
VIRGINIA
Associations must conduct a reserve study at least once every five years to determine the necessity and
amount of reserves required to repair, replace and restore the common elements or capital
components. The board of directors must review the study at least annually and make adjustments as
the board determines to keep the funding of reserves sufficient. The statutory provisions on reserves
also include requirements for the contents of the association budget if reserves are determined to be a
necessity. Section 55-79.83.1 and 55-514.1. Resale certificates must include the current reserve study
report or a summary thereof, a statement of the status and amount of any reserve or replacement fund
and any portion of the fund designated for any specified project by the association. Section 55-79.97.
WASHINGTON
Unit owners associations may adopt and amend budgets for revenues, expenditures, and reserves and
collect assessments for common expenses from unit owners, and establish and administer a reserve
account and prepare a reserve study. Section 64.34.304 and 64.38.020. The decisions relating to the
preparation and updating of a reserve study must be made by the board of directors of the association in
the exercise of the reasonable discretion of the board. Such decisions must include whether a reserve
study will be prepared or updated, and whether the assistance of a reserve study professional will be
utilized. Section 64.34.388. Associations are encouraged to establish a reserve account to fund major
maintenance, repair, and replacement of common elements, including limited common elements that
will require major maintenance, repair, or replacement within 30 years. Unless doing so would impose
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an unreasonable hardship, an association with significant assets shall prepare and update a reserve
study. The initial reserve study must be based upon a visual site inspection conducted by a reserve study
professional. Unless doing so would impose an unreasonable hardship, the association shall update the
reserve study annually. At least every three years, an updated reserve study must be prepared and
based upon a visual site inspection conducted by a reserve study professional. Section 64.34.380 and
64.38.065. The public offering statement shall include copies of the association's current reserve study,
if any. If the association does not have a reserve study, the public offering statement shall contain the
following disclosure: “This association does not have a current reserve study. The lack of a current
reserve study poses certain risks to you, the purchaser. Insufficient reserves may, under some
circumstances, require you to pay on demand as a special assessment your share of common expenses
for the cost of major maintenance, repair, or replacement of a common element.” Section 64.34.410.
WEST VIRGINIA
Unit owners associations may adopt and amend budgets for revenues, expenditures, and reserves and
collect assessments for common expenses from unit owners. Section 36B-3-102. Public offering
statement must include the amount, or a statement that there is no amount, included in the budget as a
reserve for repairs and replacement and statement of any other reserves. Section 36B-4-103.
There is no statutory requirement to conduct a reserve study and no statutory requirement to fund
reserves.
WISCONSIN
An association may, with the written consent of a majority of the unit votes, create or terminate a
statutory reserve account. Section 703.163.
There is no statutory requirement to conduct a reserve study and no statutory requirement to fund
reserves.
WYOMING
There is no statutory requirement to conduct a reserve study and no statutory requirement to fund
reserves.
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