Reserve Studies and California Law

By October 24, 2012Blog, Uncategorized

In its simplest form you can think of a Reserve Study as two basic parts: Physical Analysis and Financial Analysis. An updated Reserve Study allows communities to anticipate and prepare for major repair and replacement costs.

Read more: What is a Reserve Study?

A properly funded Reserve according to an up-to-date study will allow your community to thrive both aesthetically and functionally. As a result, you can expect sustained and in some cases, increased property values. Due to the sub-par condition of the real estate market, we’re even seeing lenders review Reserve Disclosures, particularly Percent Funded (See Reserve Glossary),  when considering whether or not to fund new home buyers.

Read more: Reserve Studies: Like a FICO Score for HOAs

Get a Reserve Study Quote for your community

However, Reserve Studies are more than “good business”. In California, it’s the law.

There are 4 basic things to remember when it comes to Reserve Studies and California Law:

1. Every 3 years you must complete a Physical Inspection.

2. Every year you must complete an Assessment and Reserve Funding Disclosure (ARFD).

3. Every year, in order to complete the Reserve disclosure, you must you must do a Level 3 Update (Financial Update).

If you comply with these 3 basic requirements your community has fulfilled its fiduciary responsibility and is therefore protected under the Business Judgement Rule.

We get this question all the time from our clients: “does the law require us to fund our reserves?”

4. California State law does not require you to fund your reserves. It does however, require you to disclose that information either way (See number 2 above).

Communities who fail to prepare updated Reserve Studies and underfund Reserves are often forced to defer common area maintenance and repairs. This is a mistake that inevitably leads to falling property values, costly Special Assessments and financial implications for new home buyers considering your community.

Read More: The Reality of Underfunded Reserves

At Barrera and Company, we complete thousands of Reserve Studies each year which have helped our clients comply with the law and prepare for upcoming expenditures. 

Interested in getting a Reserve Study for your community? Click here to get a proposal!

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