For condominium and HOA associations throughout Ohio, “budget season” has arrived or is quickly approaching. Various association Boards and Managers are reviewing the prior year’s budget and expenditures in preparation for finalizing the 2019 budget for the association. An important factor to consider when preparing an annual budget is reserves and what the specific reserve contributions should be for not only 2019 but also future years.

            For Ohio condominium associations, Ohio Revised Code §5311.081 (A)1, requires that unless otherwise provided in the Declaration and Bylaws, the Board of Directors must adopt and amend budgets for revenues, expenditures, and reserves in an amount adequate to repair and replace major capital items in the normal course of operations without the necessity of special assessments, provided that the amount set aside annually for reserves shall not be less than 10% of the budget for that year unless the reserve requirement is waived annually by the unit owners exercising not less than a majority of the voting power of the unit owners association.

            For Ohio HOA’s the standard is less specific and Ohio Revised Code §5312.06(A) (1), requires that unless otherwise provided in the Declaration and Bylaws, the Board of Directors must include reserves in any annual budget in an amount adequate to repair or replace major capital items in the normal course of operations without the necessity of special assessments, unless a majority of the owners waive the reserve requirement annually.

            Frequently our attorneys are asked how a Board determines what is “adequate” and what the 10% guideline means within the condominium statute.  While there is no requirement in Ohio law for an association to perform a reserve study, it his highly advisable that a reserve study be performed by a qualified professional experienced in reserve studies or at the very least, an engineer experienced in a particular industry related a particular physical asset. For instance, if the association is looking at potential future replacements for roadways or parking areas, the board should consider a qualified engineer experienced in paving  (the same would be true for roofs, exterior sidings, etc.).  The findings of a reserve study will change over time based on various factors such as weather, changes in frequency of use, or significant changes in projected costs related to materials and labor.  It is recommended that a 3-5 year review and update of the reserve study or asset inspections be completed.

            Can an association levy a special assessment in the even the reserves are insufficient to fund a reserve expenditure? That depends.....there is Ohio case law which supports a Board’s decision to levy a special assessment in the event there are insufficient reserves for capital expenditures; however, there is recent case law supporting the association’s declaration and bylaws which required a reserve fund so there would be no need for a special assessment.  In that instance, there was specific language in the Declaration and Bylaws requiring reserves and prohibiting a special assessment so the condominium statute did not apply and the association members could not waive the requirement by a majority vote. If you have any questions about reserves, reserve studies, or case law surrounding special assessments, please contact us for assistance.