In September of 2022, the Ohio Legislature adopted several changes to the state’s condominium statute. One of those changes was to O.R.C 5311.081(A), which removed language saying that at least 10% of an association’s annual budget must be devoted to reserves unless waived annually by a majority vote of the owners. The update also removed the reference, “unless otherwise provided in the Declaration and Bylaws” so this now means only the statute provides the requirement for reserves no matter what the Declaration and Bylaws may state. Associations always had an obligation to fund reserves properly. By removing the 10% language from O.R.C. 5311.081(A), the statute now reads, “…The budget shall include reserves in an amount adequate to repair and replace major capital items in the normal course of operations without the necessity of special assessments…” The statute goes on to provide two narrow exceptions regarding limiting language in the declaration and bylaws and an ownership vote to waive the reserve requirement.

     The new version of the statute presents the same challenge as the prior version; namely, there is no firm guidance on what “adequate” reserves are. Instead, the statute answers the question of how much a condominium association should hold in reserve by simply providing the correct amount is whatever is needed to avoid a special assessment. Given that association boards are made up of volunteers with various backgrounds that may not include the expertise needed or a magic crystal ball to provide an answer as to what an “adequate” amount is, the amount needed for reserves is something an association may not know until after the fact. This type of hindsight guidance does not provide boards with much help in determining the right amount to reserve to avoid the special assessment.

     So, what happens if condominium associations have to levy a special assessment because they do not have sufficient reserves to pay for the repair or replacement of a capital item? Does that mean that the board failed to properly budget and expose the association to liability? These are not simple questions, and the case law that exists suggests that each situation should be dealt with on a case-by-case basis. In our opinion, the best way for associations to avoid special assessments and protect the association if a special assessment needs to be levied for capital repairs or replacement is for the association to have a reserve study performed by an independent reserve specialist.

     While the statute does not specifically require condominium associations to obtain a reserve study, it certainly indirectly suggests it. Statue aside, underwriters often request, and indeed require, copies of reserve studies when determining whether to approve a loan for a unit in a condominium.  A reserve study is an analysis of the association’s current reserve levels and future funding needs. Reserve specialists, often engineers or architects, will determine what items are part of the condominium’s common elements for which the association is responsible for maintaining, project future repair and replacement costs based on the average useful life of each item, and arrive at a funding number for each item over the course of time based on current and projected market conditions. The goal is that if these reserves are funded to plan, an association will never need to make a special assessment for maintenance reasons.

     Reserve studies are an inexact science. For example, inflation can drive up costs much higher than anticipated, which recently happened and caused many associations with reserve studies to not have sufficient reserves to cover known expenses. As another example, reserve studies assume that those items were installed correctly and with appropriate materials, which often is not the case and leads to items needed to be repaired or replaced much sooner than their average useful lives. Also, reserve studies do not include projections of natural disasters or unexpected extreme weather events, which can cause capital items to be repaired or replaced sooner than expected.

     Often, when associations obtain reserve studies, they find out that their reserves are underfunded, and assessments need to be increased to improve reserve funding. This can be a daunting challenge for Boards who may face a dramatic increase in assessments to make up that gap. Fortunately, reserve studies often include multiple funding options for boards to consider bringing the reserve amount into compliance. Additionally, associations can take comfort in the fact that once the reserves are fully funded at the correct levels, they are unlikely to face the sting of an unexpected special assessment in the future. Once the reserve study is obtained and the plan is implemented, boards can take comfort in the fact that they have performed their duties to the industry standard and mitigated any liability on the association’s part for not complying with the statute.

     With all this said, we suggest that condominium boards do the following to comply with the Condominium Act and, hopefully, ensure that their reserves are properly funded:

1. Obtain a reserve study from a qualified reserve specialist.
2. Before finalizing the reserve study, review it to make sure that the specialist captured all the capital items and that the funding looks accurate. If the funding levels look off, consult with contractors or other industry professionals and obtain estimates/projections from them. If they are lower than projected in the reserve study, consult with the reserve specialist and request that the reserve study be changed to reflect those amounts.
3. Once the reserve study is finalized, fund reserves at the levels suggested by the reserve study. Do not deviate from the reserve study without a legitimate, documented reason for doing so.
4. Obtain a new reserve study every 4-5 years to make sure that your reserve study is up-to-date, and your reserve funding is appropriate based on market conditions.

     If your association has questions regarding reserve funding, reserve studies, special assessments, Ohio condominium law, generally, or need a referral to a reputable reserve study company, please visit our website at www.williams-strohm.com or call us at 614-228-0207.