Reserve Studies Minimize Liability

Now more than ever, associations are using the services of independent engineering firms that specialize in 30-year Reserve Studies.  A professional reserve study determines accurate supportable annual reserve contributions necessary for the repair or replacement of common property as it wears out over the life of the community. 

Professional Reserve Studies are designed to eliminate special assessments by ensuring that sufficient funds are available when property components need to be repaired or replaced.  Elimination of special assessments offers peace of mind to owners and reduces claims of financial mismanagement.

 Why are community associations being managed like businesses? 

Homeowners view their home as a financial investment that they expect to appreciate in value.  More important, associations are increasingly emulating business management because of the fiduciary nature and responsibility of association boards. 

Lawsuits and claims of financial mismanagement have driven state governments to protect citizens who are a part of community living.  Regulatory pressure from state governments has increased dramatically in recent years with regard to the fiduciary responsibility of boards and managers.  Examples include licensing and certification of property managers and increased state legislation.  These laws are designed to ensure that associations are reserving appropriate levels of funding for common element replacement.  Some state statutes call for “reasonable” or “adequate” reserve funds.  While regulations vary from state to state, there is a strong trend toward more legislation rather than less. 

The purpose of HOA related legislation is to protect current association members and prospective buyers, and to ensure that the association is properly managed.  Questions of fiduciary responsibility date back at least as far as the early 1980s in case law with the landmark Raven’s Cove decision, which discussed the fiduciary responsibilities of directors of a nonprofit corporation, namely, the association.  On January 20, 1981, the Court of Appeal, Taylor, P.J., held that: “…Where owners’ associations’ original directors… failed to exercise their supervisory and managerial responsibilities to assess each unit for an adequate reserve fund…former directors of the association breached their fiduciary duty and were individually liable to the association for said breach…”  Thus, important case law came into being which affects the individual liability of HOA directors and officers. Also, board members can be subpoenaed in litigious situations years after leaving the board to testify against accusations of mismanagement. 

As a director of a community association, your actions (or inactions) have an impact on you and the member’s financial well being now and in the future. Why would you not consider a Reserve Study for your association?

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