Complying with Reserve Disclosure Law

by Robert M. Nordlund, PE, RS
January 2010 (updated January 2014)
CEO/Founder
Association Reserves, Inc.
www.reservestudy.com

Understanding Reserve Disclosure Law

The purpose of this disclosure (originally 1365.2.5 in 2007, which changed to 5570 January, 2014) is to summarize Reserve Study results and clarify the current status of an Association’s Assessments and Reserves in a standard format on an annual basis, minimizing the chances of misrepresentation or surprise.

Proper completion of the 7 questions that appear on this disclosure can only be accomplished with a current-year Reserve Study and finalized budget information. Since finalized budget information typically occurs after the Reserve Study has been completed, one cannot expect the Reserve Professional to complete and finalize this disclosure at the time the Reserve Study is completed. Furthermore, if the Association establishes a Reserve contribution rate other than was recommended in the Reserve Study, additional Reserve calculations will need to be made in order to answer Question 3 and Question 4. Thus preparation of this disclosure will require the coordinated involvement of Association/Management and the Reserve Study provider.

Fortunately, Association Reserves prepares this disclosure at no extra charge, as part of the Reserve Study process for its California Clients. Our goal is to make it easy to comply with Reserve Disclosure law.

Helpful Links:
Blank Disclosure Request Form (.pdf)
CA “Do-it-Yourself” Disclosure Worksheet (.xls)
Sample Disclosure with 30 yr Summary (.pdf)

Reserve Disclosure Form Breakdown

Below is a detailed Discussion of each of the disclosure’s seven questions:

Question #1: Budgeted assessment rate for upcoming year comes from the association or mgmt, after budget has been finalized. If the association does not have equal assessments throughout, a table summarizing assessments per unit is to be provided by association/mgmt.

Question #2: Approved Special Assessments for upcoming year comes from the association/mgmt, after budget has been finalized.

Question #3: A “yes” answer requires the association to have implemented a Reserve Funding Plan that will not run out of money for projected Reserve expenses over the next 30 years with no special assessments other than those listed in #2 above. If the association’s current Funding Plan (based on Reserve contributions for the initial year found in #1 above) projects cash deficits at any point in time over the next 30 years, a “no” answer should be checked and at least one special assessment should be entered in Question #4.

A “yes” answer does not give assurance that there will be “clear sailing” for 30 years. This is only an opinion (not a promissory note) at this time, based on the association’s current 30-yr Funding Plan (which should be attached to this disclosure). It is our expectation that the Funding Plan will be reviewed and revised annually, along with the disclosure.

Note 1: “Sufficient” Reserve balances are interpreted to describe a requirement to not run out of cash (defined as “Baseline Funded” in National Reserve Study Standards). This question is not interpreted as having anything to do with the measurement tool “Percent Funded” or the conservative position of “Fully Funded”.

Note 2: It is recommended that a one-page summary of the association’s 30-yr Funding Plan be attached to the disclosure to demonstrate and document the income and expense assumptions used to answer this question.

Question #4: List additional assessments (year of assessment and total amount per unit assuming equal assessment rates), scattered through the next 30-yrs as necessary, needed for an association to avoid running out of money (see Question #3 above). This may be one large special assessment or a series of smaller assessments, and should be considered a rough opinion.

Question #5: All Major components (those meeting the National Reserve Study Standards four-part funding test) should be documented and funded through Reserves. We recommend the association document the reason(s) that any other “major” association assets failed the National Reserve Study Standards four-part funding test.

Question #6: Straightforward disclosure of a projection of the Reserve Fund Balance and the Fully Funded Reserve Balance computation (“required amount in the Reserve Fund”) as-of the first day of the upcoming fiscal year (which is equivalent to the end of the current year). This information is contained in a current Reserve Study (provide name of organization and date of Reserve Study).

Question #7: The State-suggested disclosure format is currently problematic due to a requirement for five years of information with only one set of blanks. Recommendation: attach a 30-yr summary table containing the following information: Fiscal Year, Starting Balance, Fully Funded Balance, Percent Funded, Annual Contributions, Special Assessment/Loans, Interest Income, and Reserve expenses (see attached). Note that this 30-yr table also has the dual purpose of documenting assumptions utilized in answering Question #3. General Recommendation: Provide the name or organization filling out the disclosure, and the date it was prepared.

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