Understanding Reserves and Reserve Studies
We have included a section which helps to explain terminology and simple methodology with reference to reserves and reserve studies
NRS116 - Relating to Reserves & Reserve Studies
NRS116-31038 - (3) Dec-larant issues
NRS116-31039 - (1b,2) Declarant issues
NRS116-31073 - "Main-tenance, repair, restora-tion and replacement of "security" (perimeter) walls."
NRS116-3114 - Surplus Funds
NRS116-31144 - (1a) Audit & Review ...
NRS116-3115 - (1,2) Assessments & Funding
NRS116-31151 - (1) Annual Distribution ...
NRS116-31152 - "Study of reserves; duties of executive board regarding study; qualifications of person who conducts study; contents of study; submission of summary of study to Division"
NRS116-31175 - (1c,4c) Availability of Study ...
NRS116-4109 - (1c,6) Resale of Unit ...
RESERVES & RESERVE STUDIES
INFORMATION, ISSUES, QUESTIONS, UPDATES, NEWS
As we get in to this subject matter, two things need to be understood, particularly in Nevada.
1. People who live in Common Interest Communities (HOA's, Condominiums, Townhomes, etc) pay ASSESSMENTS NOT DUES. You can stop paying dues to your golf or health club and lose your membership, but you cannot stop paying your assessments and continue living in the community. YOU CAN LOSE YOUR HOME.
2. People who manage Common Interest Communities in Nevada are Community Association Managers (CAMs). Not Property Managers. These are two different licenses and confusing or misrepresenting oneself as one or the other can result in serious issues with the Nevada Real Estate Division.
FIDUCIARY DUTY ... Board's have a legal duty to the association and ultimately the owners.
The simplest definition of Fiduciary Duty is "the legal duty of a fiduciary (board member) to act in the best interests of the beneficiary (the association and ultimately the owners). See HOA Boards and Ethics for a Power Point Presentation created by the NV Real Estate Division (NRED) on the legal and ethical responsibilities of Boards and Board Members.
This information is brought to your attention because many board members fail to understand the importance of their position and its heavy responsibilities (and liabilities). Part of that responsibility is to maintain the community to the highest level as originally planned by the developer. The importance of this is reflected in the current property values. If the board(s) both past and current have been fulfilling their responsibility, the properties will look and sell well. A board member's duty is not to keep the assessments low, it is to budget according to the needs of the operating budget as well as the reserve budget which are funded in order to allow for the ongoing routine preventive maintenance (Typically Operating Budget), long term maintenance and capital improvements (Reserve Budget and Reserve Studies).
Key Points for Reserves and Reserve Studies
Most homeowner associations are entrusted with substantial common elements which must be maintained, replaced or renewed. All of this costs a lot of money. Borrowing said money is a very bad idea because it comes at a very high price in the way of interest and fees which must be repaid along with the principal. The cheapest and fairest way to pay for these expenses is to earmark a portion of the monthly, quarterly or annual fees and hold this money in reserve for future expenses. In many states, Reserve funding is required by state law. Many also require a Reserve Study be performed in order to determine the required (or recommended) funding level. A properly done reserve study will inform the board how much the earmark should be so that all pay a fair share of a 30-year plan. If this is done, special assessments are rarely, if ever, needed and the board has the money when needed.
But keep in mind that even the best reserve study has its limitations. While it predicts likely useful life spans and replacement costs, it can’t guarantee either one. A reserve study is based on assumptions that change over time. The climate, weather, soil conditions, maintenance, design and construction quality play a role in the aging process, causing some components to age differently than expected. The financial climate is also variable. Investment earnings and the inflation change. Cost ESTIMATES may be accurate at the time of the study, but considering all other factors mentioned above, may vary significantly in a very short period of time. In Nevada, the State Statute only requires a study to be updated MINIMALLY, every 5 years. Waiting 5 years only gives these variables and other fluctuations opportunity to wreak havoc on the reserve study predictions. Therefore, in order to keep the reserve study predictions as accurate as possible, industry experts recommend (and state statutes often require) that the reserve study be updated more frequently, if not annually.
LINKS TO NEW PAGES ON RESERVES & MAINTENANCE
What are RESERVES and RESERVE STUDIES?
Reserves, as relates to Common Interest Communities, (From this point forward we will refer to Common Interest Communities as CICs) are funds collected from the owners in addition to those collected for the annual operating budget, that are set aside for future maintenance, repair and replacement of the major common elements. These funds, per Nevada law, are deposited in a separate account and can only be used for those purposes defined by law and in the reserve study.
A simple definition of a Reserve Study ... It is a document which is the result of a qualified individual performing certain tasks minimally consisting of a physical inventory and visual inspection of those components which the association is responsible for maintaining, repairing or replacing. This is followed by attaching estimated replacement/maintenance costs and remaining lives to these components. From this, a 30 year table of projections is created by running the previous inventory and costs through various algorithms to create the 30 year table of estimated future costs and estimated required funding. This document is updated minimally by Nevada law every 5 years. Smart business would recommend updating minimally every 2 years with a Financial Update. It is strongly recommended for associations with walls, extensive landscaping, streets, recreational facilities such as pools, clubhouses, fitness centers, or any uncommon or unusual common elements (such as lakes, docks) etc., have an update more frequently.
It's important to understand that no one type of study will fit all communities. Every community is different, can be from 10 to 50,000 homes, has different types and quantities of components, is a different age and has owners of different financial capabilities.
Why have Reserves or Perform Reserve Studies?
There are basically two reasons for having reserve funds and performing reserve studies in Nevada ...
The first is quite simple ... Nevada law requires it. NRS116 requires that an association maintain a separate reserve fund and a separate budget for the reserves. Moneys in the reserve account can only be used for those items specified in the reserve study. Reserves must be "adequately" funded and Nevada Administrative Code (NAC116.425 sec 2) defines "adequate" funding as whatever the association documents or the reserve study state as the requirement.
Second ... The Board of Directors has a legal fiduciary duty to Maintain, Preserve, Protect and Enhance the common elements. Putting adequate money away for future repairs and replacements also helps to ensure that special assessments won't be required in order to fund these projects. Nevada Law specifically states that the reason for adequately funded reserves is to prevent the need for unexpected special assessments.
Additionally ... Reserve Studies must be performed by a qualified person registered with the NRED and be consistent with the requirements set forth in NRS116.
The Reserve Study Enables Associations to Plan for Future Major Expenses Without Having to Rely Upon Special Assessments … Which, in the Past, Have Been Very Destructive to Community Harmony, Home Resales as Well as to the Financial Well Being of It’s Residents.
Create an Association Profile
Any prospective firm a manager or management company might work with will want to know about your association. Gather information on your association and develop a complete description of it. Include details such as the location (maps), number of units, description of buildings, list of amenities, a current financial statement and budget to demonstrate how much money has been set aside to date, and what future contributions to the reserves will be, etc. This will be a great help to any company bidding on managing your property.
Checklist for Reserve Providers ... Updated 04/2018
Looking to hire a Reserve Study Specialist? Here is a checklist for perspective candidates to fill out which will provide a good initial indication of their background and capabilities ...
Questions or Comments?
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