By Amy M. Smith and Todd J. Skowronski
HB 5019 is a new bill pending in the Michigan House that will require condominium associations in the state to conduct periodic reserve studies to help plan for future repairs and replacements. The Community Associations Institute’s Michigan Legal Action Committee fully supports this bill and is undertaking efforts to gain legislative support.
The law would apply to condominium associations with annual budgets over $20,000 or more than 20 units. Within three years, these associations would be required to conduct an initial professional reserve study if they had not already, then update it at least every five years thereafter. The reserve study must generally be done by an architect, engineer, or an individual certified in preparing reserve studies.
Reserve studies identify all major components the association is responsible for repairing and replacing, such as roofs, elevators, HVAC systems, roads, etc. It estimates their remaining useful life, current and future replacement cost, and recommended annual reserve contribution. Associations will then develop a funding plan based on the study’s recommendations.
The bill requires that each year, as part of the budgeting process, boards must review their progress on meeting reserve study funding goals. When distributing the annual budget, boards must also notify owners of the current reserve fund balance and date of the last study.
The law aims to prevent unexpected financial shortfalls. Reserves must be kept in a separate account from operating funds and meet any minimum set by the state. If reserves fall short for a major project, associations could face unpopular special assessments or be forced to take on interest bearing loans.
Regardless of whether this bill passes, reserve studies are valuable tools for condominium associations to be fully informed of the current condition of all common elements, as well as begin to prepare for inevitable future repair and replacement costs. We recommend that your association review its current reserves and last study if one exists.
If this bill does pass, condominium associations subject to this bill should budget for a professional study if you do not already have one, as it will need to be completed within the 3-year deadline.
Proactive reserve planning will help Michigan condominium boards avoid surprise repairs and keep their communities in good shape. Reaching funding goals requires discipline, but this law provides boards with guidance on the requirements. While extra reserve contributions may be difficult in the short term, properly funded reserves pay off when the major capital repairs or replacements become necessary down the road.
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