Importance of Proper Reserve Studies

By Scott P. Kelsey, Esq.
Partner At Angius & Terry LLP

Pursuant to the Nevada Revised Statutes (“NRS”) Chapter 116 – Common-Interest Ownership (Uniform Act), Nevada homeowners associations are required to procure a study of their reserves. From our experience, it is critically important to have a proper reserve study prepared for the homeowners association and the benefit of the common-interest community. Unfortunately, over the years we have been involved in a number of litigated matters where serious and significant problems were identified to exist arising from errors and omissions in reserve studies prepared for our clients.

Under Nevada law, NRS 116.31152 provides the statutory mandates pertaining to the preparation of reserve studies and requires as follows (in pertinent part):

1. The executive board shall:

(a) At least once every 5 years, cause to be conducted a study of the reserves required to repair, replace and restore 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;

(b) At least annually, review the results of that study to determine whether those reserves are sufficient; and

(c) At least annually, make any adjustments to the association’s funding plan which the executive board deems necessary to provide adequate funding for the required reserves.

In addition to the foregoing, NRS 116.31152 also requires as follows (in pertinent part):

3. The study of the reserves must include, without limitation:

(a) 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;

(b) 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;

(c) 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 paragraph (b);

(d) 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 paragraph (b) during and at the end of its useful life; and

(e) 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 paragraph (b), 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 reserve study serves such an important function for the homeowners association and the common-interest community as a whole, the reserve study must not be subject to any errors and/or omissions that will later lead to a reserve underfunding problem. It is incumbent upon a homeowners association executive board to ensure that the reserve study has been properly prepared by the reserve study specialist hired by the homeowners association to prepare the same.

Before a reserve study is prepared, the executive board should take great effort to ensure that the reserve study specialist is provided with all information and documentation pertaining to the community common elements including:

The exact age of the major components of the common elements;
Any repairs performed to the major components of the common elements;
The community Covenants, Conditions & Restrictions (“CC&R’s”); and
Any other relevant information and documentation requested by the reserve study specialist.

In addition, once the executive board receives the reserve study, it must review the same in great detail to ensure that the information contained in the reserve study is correct, and especially that all major components of the community common elements have been included in the reserve study.

As previously indicated, some of the serious and significant reserve study problems we have encountered from litigated matters we have been involved in are as follows:

Reserve study specialists not properly accounting for the age of the major components of the community common elements, which leads to significant errors in estimating the remaining useful life of the major components;
Reserve study specialists omitting major components of the community common areas from the reserve study;
Reserve study specialists cutting corners and not properly inspecting the current conditions of the major components of the community common areas, including not performing an inspection of the common area roofing components;
Reserve study specialists relying heavily upon information contained in prior reserve studies, which themselves contained major errors and omissions for various reasons (sometimes purposely created by the Declarant during its control period, so that its reserve funding obligation is minimized); and
Reserve study specialists ignoring and/or inability to identify defective construction of the major components of the common elements, which will ultimately substantially lessen the estimated useful life of the major components that have been set forth in the reserve study.

A reserve study that suffers from any one, or more, of these problems will detrimentally impact the sufficiency of the community reserves, and will require additional reserves funding by way of raising homeowner association dues and/or homeowner special assessments. Therefore, based on the foregoing and in keeping with Nevada law, it is of critical importance that a homeowners association executive board take all steps necessary to ensure that a proper reserve study is procured to protect the best interests and financial well-being of the community.