California HOA Escrow Services
Summary of Reserve Study Laws
The Civil Code requirements for reserve studies include but are not limited to the following:
- Perform a Reserve Study at least every 3 years
- Update your association Reserve Study annually
- Identify all common area components with less than a 30 year life
- Estimate the life expectancy for those components
- Estimate the costs to repair or replace those components
- Compile a statement of monthly contributions to cover the costs
- Calculate “Percent Funded” as required by law
- Prove the adequacy of the reserve contributions with a 30-year cash flow
California Civil Code Sections-Reserve Studies
At least once every three years, the board shall cause to be conducted a reasonably competent and diligent visual inspection of the accessible areas of the major components that the association is obligated to repair, replace, restore, or maintain as part of a study of the reserve account requirements of the common interest development, if the current replacement value of the major components is equal to or greater than one-half of the gross budget of the association, excluding the association’s reserve account for that period. The board shall review this study, or cause it to be reviewed, annually and shall consider and implement necessary adjustments to the board’s analysis of the reserve account requirements as a result of that review.
The study required by this section shall at a minimum include:
- Identification of the major components that the association is obligated to repair, replace, restore, or maintain that, as of the date of the study, have a remaining useful life of less than 30 years.
- Identification of the probable remaining useful life of the components identified in paragraph (1) as of the date of the study.
- An estimate of the cost of repair, replacement, restoration, or maintenance of the components identified in paragraph (1).
- An estimate of the total annual contribution necessary to defray the cost to repair, replace, restore, or maintain the components identified in paragraph (1) during and at the end of their useful life, after subtracting total reserve funds as of the date of the study.
- A reserve funding plan that indicates how the association plans to fund the contribution identified in paragraph (4) to meet the association’s obligation for the repair and replacement of all major components with an expected remaining life of 30 years or less, not including those components that the board has determined will not be replaced or repaired.
For purposes of this section, the following definitions apply:
- “Associated waterproofing systems” include flashings, membranes, coatings, and sealants that protect the load-bearing components of exterior elevated elements from exposure to water.
- “Exterior elevated elements” mean the load-bearing components together with their associated waterproofing system.
- “Load-bearing components” means those components that extend beyond the exterior walls of the building to deliver structural loads to the building from decks, balconies, stairways, walkways, and their railings, that have a walking surface elevated more than six feet above ground level, that are designed for human occupancy or use, and that are supported in whole or in substantial part by wood or wood-based products.
- “Statistically significant sample” means a sufficient number of units inspected to provide 95 percent confidence that the results from the sample are reflective of the whole, with a margin of error of no greater than plus or minus 5 percent.
- “Visual inspection” means inspection through the least intrusive method necessary to inspect load-bearing components, including visual observation only or visual observation in conjunction with, for example, the use of moisture meters, borescopes, or infrared technology.
At least once every nine years, the board of an association of a condominium project shall cause a reasonably competent and diligent visual inspection to be conducted by a licensed structural engineer or architect of a random and statistically significant sample of exterior elevated elements for which the association has maintenance or repair responsibility.
The inspection shall determine whether the exterior elevated elements are in a generally safe condition and performing in accordance with applicable standards.
Prior to conducting the first visual inspection, the inspector shall generate a random list of the locations of each type of exterior elevated element. The list shall include all exterior elevated elements for which the association has maintenance or repair responsibility. The list shall be provided to the association for future use.
The inspector shall perform the visual inspections in accordance with the random list generated pursuant to subdivision (c). If during the visual inspection the inspector observes building conditions indicating that unintended water or water vapor has passed into the associated waterproofing system, thereby creating the potential for damage to the load-bearing components, then the inspector may conduct a further inspection. The inspector shall exercise their best professional judgment in determining the necessity, scope, and breadth of any further inspection.
Based upon the inspector’s visual inspections, further inspection, and construction and materials expertise, the inspector shall issue a written report.
Reserve Funding Plan
The reserve funding plan shall include a schedule of the date and amount of any change in regular or special assessments that would be needed to sufficiently fund the reserve funding plan.
The plan shall be adopted by the board at an open meeting before the membership of the association.
If the board determines that an assessment increase is necessary to fund the reserve funding plan, any increase shall be approved in a separate action of the board.
The summary of the association’s reserves shall be based on the most recent review or study conducted, shall be based only on assets held in cash or cash equivalents, shall be printed in boldface type, and shall include all of the following:
a. The current estimated replacement cost, estimated remaining life, and estimated useful life of each major component.
b. As of the end of the fiscal year for which the study is prepared:
- The current estimate of the amount of cash reserves necessary to repair, replace, restore, or maintain the major components.
- The current amount of accumulated cash reserves actually set aside to repair, replace, restore, or maintain major components.
- If applicable, the amount of funds received from either a compensatory damage award or settlement to an association from any person for injuries to property, real or personal, arising out of any construction or design defects, and the expenditure or disposition of funds, including the amounts expended for the direct and indirect costs of repair of construction or design defects. These amounts shall be reported at the end of the fiscal year for which the study is prepared as separate line items under cash reserves pursuant to paragraph (2). Instead of complying with the requirements set forth in this paragraph, an association that is obligated to issue a review of its financial statement pursuant to Section 5305 may include in the review a statement containing all of the information required by this paragraph.
c. The percentage that the amount determined for purposes of paragraph (2) of subdivision (b) equals the amount determined for purposes of paragraph (1) of subdivision (b).
d. The current deficiency in reserve funding expressed on a per unit basis. The figure shall be calculated by subtracting the amount determined for purposes of paragraph (2) of subdivision (b) from the amount determined for purposes of paragraph (1) of subdivision (b) and then dividing the result by the number of separate interests within the association, except that if assessments vary by the size or type of ownership interest, then the association shall calculate the current deficiency in a manner that reflects the variation.
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