Understanding the Michigan Reserve Study Bill: Essential Updates for Condominium Associations
Did you know that Michigan’s HB 5019, a new bill pending in the Michigan House, aims to bring significant changes to the way condominium associations manage their reserve funds? Currently, Michigan law requires that condominium associations maintain a reserve fund for major repairs and the replacement of common elements. The state administrative code mandates that this reserve fund must be at least 10% of the association’s current annual budget, ensuring that funds are available for substantial repairs and replacements. The bylaws must also include a statement urging associations to carefully analyze their specific needs to determine if more than the minimum reserve amount is necessary.
However, there is no statutory requirement to conduct a reserve study, which is a detailed analysis to help associations plan for future repairs and replacements. This gap is what HB 5019 seeks to address.
What is HB 5019?
HB 5019 is an informational tool intended to inform condominium association members about the cost of maintaining the community’s common elements. HB 5019, if passed, will require condominium associations in Michigan with annual budgets exceeding $20,000 or with more than 20 units to conduct periodic reserve studies. These studies are crucial for identifying and planning for the future maintenance needs of common elements such as roofs, elevators, HVAC systems, and roads.
Key Provisions of the Bill
- Initial Reserve Study:
- Associations must conduct an initial professional reserve study within three years if they haven’t already done so.
- For newly established condominium projects, the study must be completed no later than 30 days before the transitional control date.
- Periodic Updates:
- Reserve studies must be updated at least once every five years to ensure that the information remains current and accurate.
- Qualified Professionals:
- The reserve study must be conducted by an architect, engineer, or an individual certified in preparing reserve studies. This ensures that the study is thorough and reliable.
- Annual Review and Reporting:
- Each year, as part of the budgeting process, boards must review their progress in meeting reserve study funding goals.
- When distributing the annual budget, boards must notify owners of the current reserve fund balance and the date of the last reserve study
Importance of Reserve Studies
Reserve studies are valuable tools that provide a detailed inventory of all major components the association is responsible for maintaining. They estimate the remaining useful life and current and future replacement costs of these components, along with recommended annual reserve contributions. This information helps associations develop a funding plan to meet future financial needs.
Implications of the Bill
- Financial Planning: By requiring regular reserve studies, HB 5019 aims to prevent unexpected financial shortfalls that can lead to unpopular special assessments or the need for interest-bearing loans.
- Proactive Maintenance: Regularly updated reserve studies help associations plan proactively for repairs and replacements, maintaining the community’s infrastructure and preventing costly emergency repairs.
- Transparency and Accountability: The bill mandates that reserve fund information be readily available to owners, prospective buyers, and mortgagees, fostering transparency and accountability in financial management.
Recommendations for Condominium Associations
Regardless of whether HB 5019 passes, it is highly recommended that condominium associations:
- Conduct regular reserve studies to stay informed about the condition of common elements.
- Review their current reserves and last reserve study, if one exists.
- Consider budgeting for a professional reserve study if they do not already have one.
Proactive reserve planning will help Michigan condominium boards avoid surprise repairs and keep their communities in good shape. While additional reserve contributions may be challenging in the short term, they provide significant benefits in ensuring that major repairs and replacements can be funded without financial strain.
Conclusion
HB 5019 represents a critical step towards enhancing the financial health and stability of condominium associations in Michigan. By mandating regular reserve studies and ensuring proper reserve funding, the bill aims to provide associations with the tools they need to effectively manage their communities’ long-term maintenance needs. Associations are encouraged to stay informed about the progress of this bill and to begin planning for its potential requirements to ensure a smooth transition and continued financial health.
Rita Khan is the Director of Marketing at Hirzel Law, PLC. Ms. Khan received her Bachelor of Arts in American Culture from the University of Michigan, Master of Business Administration with a focus on Business Intelligence from Baker College, Paralegal Certificate from the University of Michigan Flint – Center for Legal Studies, and Graphic Design Certification from the New York Institute of Art and Design. Ms. Khan has over 15 years of experience in the property management industry from residential real estate, student housing, and condominium & HOA management. Ms. Khan holds several designations and certifications such as Certified Manager of Community Associations (CMCA), Association Management Specialist (AMS) and Professional Community Association Manager (PCAM) from the Community Associations Institute (CAI), Accredited Residential Manager (ARM), Accredited Commercial Manager (ACoM), and Certified Property Manager (CPM) from the Institute of Real Estate Management (IREM), Certified Apartment Manager (CAM), Certified Apartment Portfolio Supervisor (CAPS), and Certified Apartment Supplier (CAS) from the National Apartment Association (NAA), Project Management Professional (PMP) from the Project Management Institute, Certified ScrumMaster (CSM) from Scrum Alliance, Professional Certified Marketer Marketing Management (PCM) from the American Marketing Association and Certified Digital Marketing Professional (CDMP) from the Digital Marketing Institute. She is a licensed Michigan Real Estate Salesperson, Broker and Notary Public. Ms. Khan is also a Real Estate Property Management faculty member at Schoolcraft College where she teaches Introduction to Property Management and Residential and Commercial Property Management. Ms. Khan currently serves as the Chair of the CAI Michigan Social Media Committee and is an active member of the Institute of Real Estate Management (IREM), where she serves as a member of the IREM Foundation Board of Directors and a member of the Board of Directors for the IREM Michigan Chapter. Ms. Khan has previously served as a Delegate Member on the CAI Michigan Legislative Action Committee. She may be reached at (248) 478-1800 or rkhan@hirzellaw.com.
