New Tennessee Law Impacts Reserve Studies
On April 23, 2023, Governor Bill Lee signed Senate Bill 863 and House Bill 750 into law. Effective January 1, 2024, the law requires condo association boards to have a reserve study done on or before January 1, 2024, if the board has not had a reserve study conducted on or after January 1, 2023. The law also requires boards to have an updated reserve study done within five years of the original reserve study date and every five years thereafter. The legislation further outlines that if an association has performed a study after January 1, 2020, it will count as the first and start the five-year clock.
The new law aims to inform condo association boards of the condition and life expectancy of common elements, allowing them to reserve funds for maintenance, and to avoid special assessments. This legislation is in response to the Champlain Towers South Condominium collapse in Surfside, Florida, on June 24, 2021.
In light of this new law, we have compiled frequently asked questions to help you better understand reserves and reserve studies.
1. Why does Tennessee have this new law?
On June 24, 2021, Champlain Towers South, a 12-story beachfront condominium in Surfside, Florida, partially collapsed. A study concluded that the condo association only had 6.9% of the recommended funds to complete repair and replacement projects and stay financially secure. It is believed that a severe lack of maintenance due to underfunded reserves was to blame.
One of the most important responsibilities of your condo association's board is effectively planning for repairs and replacements. Boards must ensure the association has enough funds when needed, regardless of whether a costly expenditure is required immediately or 20 years from now. Inadequate reserve funding can lead to deferred maintenance, compromising a community's safety, integrity and preservation. A reserve study will help your board better understand your association's finances to plan and fund your reserves for upcoming expenditures.
“Preventing the burden of future expenditures on your association is one of your top responsibilities as a board member,” said Danny Ellis, president at FirstService Residential. "By prioritizing adequate reserve funding, boards can better protect their community's value and keep residents safe.”
2. What exactly is a reserve study?
A reserve study identifies predictable common-area repair and replacement projects so the association can prepare financially to meet those costs. The study examines common elements likely to need significant repairs or replacement within 20 to 30 years and helps your condo association board predict when capital expenditures will be necessary.
There are two parts to the reserve study:
- A physical analysis that involves an onsite inspection of your property's components and includes an estimate of their expected useful life
- A financial analysis that determines how much money you must collect each year to cover the cost of repairing or replacing those components adequately, taking into consideration how much you already have in your reserve fund.
Learn more about reserve studies and planning your maintenance and capital improvements by watching Ask the Experts: The Path to a Great Reserve Study
3. Who should conduct your association’s reserve study?
It’s essential to have your reserve study conducted by a qualified third-party specialist with a background in engineering, architecture, or general contracting and proper credentials from a recognized accredited organization. Boards must ensure the provider is also familiar with components in your specific area since their useful life can vary due to weather and other region-specific conditions.
Work with your property management partner who can recommend the most experienced and reputable reserve study firms you should consider.
4. What information should you communicate to the reserve study firm?
Creating a comprehensive picture of your association is important when working with a reserve study firm. The firm will need basic information about your community’s age, type, square footage, number of units, amenities, maintenance records, the age of all mechanical components and any repairs or replacements you’ve already made. It is essential to inform the firm what repairs have been done, when they were done, and how much they cost. This will allow them to account for them in reserves. This also helps ensure that the firm’s estimates are reasonable and not overestimated or underestimated. For example, if you recently paid $60,000 to paint your building, but the study indicates that it will cost $100,000 next time, you will want to inquire why there is such a significant increase in cost.
5. What are the risks of underfunding your reserves?
The last thing your board wants is to defer necessary repairs due to a lack of funds. Underfunded reserves can impact your community’s property values, resident safety and the integrity and appearance of your structures and grounds. Maintaining an adequately funded reserve account ensures that your association will have the money to replace expensive items (typically those costing more than $10,000) and make significant repairs to roofs, mechanical equipment, garages, amenities, and other common areas when the time comes.
“Sometimes owners perceive reserves as an unnecessary financial burden and may not want to fund them. This can lead to special assessments or deferred repairs,” according to Henry McKenna, regional account manager at Reserve Advisors. “Your association should work with a reputable firm dedicated to helping your board secure the long-term financial and physical health of your community.”
6. What else should boards know about reserve studies and building safety?
Boards should understand the importance of preventive maintenance in ensuring that building systems and components operate correctly and as efficiently as possible, and extending the life span of these. This allows your board to address any issues before they escalate into costly burdens or safety concerns.
Learn the key components of a preventive maintenance program. Read: Keep Your Condo or Community Running Like a Well-Oiled Machine with a Solid Preventive Maintenance Plan
The new law is in place to help condo association boards effectively plan for repairs and replacements. This will ensure your community's long-term safety, integrity, and preservation.
The right property management company will offer sound guidance on establishing and maintaining effective reserve studies to help protect your community’s financial health.
Contact FirstService Residential for guidance.