Declarant Reserve Account Underfunding

 
Pursuant to the Nevada Revised Statutes (“NRS”) Chapter 116 – Common-Interest Ownership (Uniform Act), Nevada homeowners associations are required to establish adequate reserves for the repair, replacement and restoration of the major components of the common elements and any other portion of the common-interest community that the association is obligated to maintain, repair, replace or restore.

It is during the time of Declarant control of the homeowners association that the reserve account is established and funding of the account begins. A properly funded reserve account is of critical importance for the association and the common-interest community as a whole.

Under Nevada law, within thirty (30) days after the Declarant’s control of the association ends, the Declarant must deliver to the association a reserve account that contains the Declarant’s share of the amounts then due, and control of the reserve account. In addition, the Declarant must deliver a complete study of the reserves of the association, conducted by a person who is registered as a reserve study specialist.

It is vital for the Declarant to have a proper reserve study prepared for the association, as the reserve study provides the recommended baselines for the funding of the reserve account and for the monthly funding of the reserve account. Unfortunately, from our experience representing homeowners associations over the years, Declarants have negligently or intentionally procured understated reserve studies, which then lead to underfunded reserve accounts.

Nevada law requires that the study of reserves must include, without limitation, as follows:

1. A summary of an inspection of the major components of the common elements and any other portion of the common-interest community that the association is obligated to maintain, repair, replace or restore;
2. An identification of the major components of the common elements and any other portion of the common-interest community that the association is obligated to maintain, repair, replace or restore which have a remaining useful life of less than 30 years;
3. An estimate of the remaining useful life of each major component of the common elements and any other portion of the common-interest community that the association is obligated to maintain, repair, replace or restore identified pursuant to 2.;
4. An estimate of the cost of maintenance, repair, replacement or restoration of each major component of the common elements and any other portion of the common-interest community identified pursuant to 2. during and at the end of its useful life; and
5. An estimate of the total annual assessment that may be necessary to cover the cost of maintaining, repairing, replacement or restoration of the major components of the common elements and any other portion of the common-interest community identified pursuant to 2., after subtracting the reserves of the association as of the date of the study, and an estimate of the funding plan that may be necessary to provide adequate funding for the required reserves.

Because the Declarant is financially responsible for ensuring that the reserve account is funded in keeping with the reserve study it procures for the homeowners association at the end of the Declarant’s control period, an understated reserve study certainly lessens the financial burden on the Declarant. However, an understated reserve study resulting in an underfunded reserve account is to the detriment of the association and the common-interest community. Therefore, it is incumbent upon the executive board, at the time of transition from Declarant control of the association, to ensure that the reserve account has been properly funded by the Declarant and that the provided reserve study is free from any errors and/or omissions that will later lead to a reserve underfunding problem. In fact, we highly recommend that the executive board immediately procure a second reserve study from a different reserve study specialist than was utilized by the Declarant. Moreover, we do not recommend that the reserve study specialist be provided with the reserve study procured by the Declarant, so that a true “second opinion” is obtained by the association.

Should the executive board discover that the Declarant has not properly funded the association’s reserve account at the termination of Declarant’s control period, pursuant to Nevada law, the Declarant can be held liable for its wrongful acts or omissions. The Declarant can also be held liable for all expenses of litigation (if necessary), including reasonable attorney’s fees, incurred by the association.

Therefore, based on the foregoing and in keeping with Nevada law, it is of great importance that a homeowners association’s executive board take all steps necessary to ensure that the reserve account has been properly funded by the Declarant to protect the best interests and financial well-being of the community.

Thanks,
Scott P. Kelsey, Esq.
ANGIUS & TERRY LLP