Mandated Reserves

The most significant provision of Ohio’s new condominium legislation is mandated reserves.

5311.081(A)(1) specifies that “unless otherwise provided in the declaration or bylaws,” the board 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, 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.

Ohio’s new condominium law is not completely retroactive. As a result, if current governing documents specifically define the required amount of reserves to be held, i.e., six months maintenance fees, then the current document provisions control.

Most governing documents indicate, however, that the board shall build up and maintain “reasonable reserves.” Ohio boards have long debated the definition of “reasonable.” 5311.081(A)(1) now provides a standard of care that calls on boards to budget and build reserves so as to operate “without the necessity of special assessments.”

One negative connotation condominium living has received is the tendency to special assess owners for major repair projects. Special assessments cause financial hardships, increase foreclosures, and decrease an association’s reputation. Ohio legislators obviously heard the complaints of owners on the receiving end of special assessments. As a result, we have a state mandated standard of budgeting, which, at a minimum, requires communication and a vote by ownership if the standard is not going to be met. In reality, the new law is more about mandating communication with the owners about reserves than it is about mandating reserves.

It is unrealistic to expect currently existing associations to operate without special assessments. However, ten or fifteen years from now, a special assessment in a currently existing association could very well be met with a lawsuit by an owner claiming the board breached a duty. As a result, a wise board should consider implementing the following procedure:

authorize the completion of a reserve study so as to detail the association’s component parts, life expectancy and replacement costs. Share the results of the reserve study with the owners and budget in accordance with the reserve study.

For many associations, fully funded reserves in accordance with a reserve study are going to cause a drastic, but necessary, increase in fees. If a board believes that fully funding the reserves will cause too drastic of an increase, it must send a letter and a ballot to each owner. The letter must disclose the amount necessary for fully funded reserves. This disclosure should mitigate any claims against the board by a future purchaser who gets hit with a large special assessment. In addition to disclosing the amount necessary to fully fund reserves, the board should indicate the lower amount the board proposes be put into reserves, and request ownership approval of the alternative, lower amount. A ballot should be included for the owner to sign and return. In the event the board fails to obtain majority approval for the lower reserve amount, the fully funded reserve must be implemented. Current bylaws dictate the date by which the board must have an approved budget for the following year. All balloting must be completed in time for the board to meet the required budget approval date.

Ohio’s new law on mandated reserves is silent as to any aspects other than the budgeting. In other words, the law contains no restraints on the board’s spending of the reserves. While this section of the new law is the most significant, it also could clearly cause the most litigation against associations who fail to budget and set aside reserves so as to operate “without the necessity of special assessments.”