See also, Index, reserve analysis.
Amount of Reserves
Utah law does not require any particular amount of reserves for associations. It does, however, require a board to be prudent in funding reserves, thus the board must act with care, good judgment and thought for the future when deciding how much to fund reserves. This requirement carries over from the standards imposed by law on all board members, one of which is the duty to act with the care an ordinarily prudent board member of a homeowner association would exercise under similar circumstances. See Index, standard for board/director/ARC decisions and Utah Code § 16-6a-822.
Each yearly budget of an association must include a line item that identifies the amount to be placed into a reserve fund in an amount the board determines, based on the reserve analysis, to be prudent, or an amount required by the governing documents, if the governing documents require a higher amount. The owners may veto the line item by following the procedure specified by law and outlined in the Index, budget.
The board must establish and keep at least one reserve account that is separate from other association funds. See Utah Code §§ 57-8-7.5(9)(b) and 57-8a-211(9)(b) and footnote 4 thereto.
Money in a reserve fund may not be used for "daily maintenance expenses" or for any purpose other than "the purpose for which the reserve fund was established," unless a majority of the owners approve or there is a shortfall in the general budget. (However, members of the association may prohibit the use of reserve fund money for daily maintenance expenses if there is a shortfall in the general budget, by a 51% vote of all voting interests at a special meeting called for that purpose and for which each owner receives at least 48 hours notice.) See id. at subsection (9).
- Daily Maintenance Expenses. The statutes do not define daily maintenance expenses, thus, unless the phrase is a technical term of art, the ordinary meaning of in common usage applies. HOAs are run by volunteer homeowners from all walks of life and whose careers and experience vary widely. Thus, it's not reasonable to think the Legislature would use a technical term of art with an arcane meaning in this situation. The ordinary meaning of "daily" in common usage is "of, done, made or occurring, each day or each weekday." See merriam-webster.com definition; see also dictionary.com definition. Thus, daily maintenance expenses are maintenance expenses occurring each day, or at least each workday.
- Purpose of Reserve Fund. The purpose for which a reserve fund is established is not dictated by the statute.fn1 Instead, that purpose is most often contained in the CC&Rs, which will often have language stating something to the effect that reserves will be established for emergencies, contingencies, long-term maintenance items and so forth. If the CC&Rs are silent on the issue, the purpose of the reserve fund may be established in past meeting minutes or a resolution reflecting the decision to fund reserves.
If there is no record of the purpose for which the reserve fund was established, a board should look to other records a reasonable homeowner in the association would expect to establish the purpose of the reserve fund. That is, the statute is intended to protect the expectations and interests of the homeowners by requiring a vote of the owners before reserves are used for some other purpose than what everyone reasonably thought was the purpose of the reserve fund. So, if there is such a record, which may include the reserve analysis, the board should evaluate whether it has in effect come to establish the purpose of the reserve fund. Finally, if none of the above apply, the board should adopt a resolution specifying the purpose of the reserve fund.
FN 1. In interpreting the requirement in subsection (9) that owner approval is required in order to use money in a reserve fund "for any purpose other than the purpose for which the reserve fund was established," it is important not to confuse "the purpose of the reserve fund" with the purpose, or definition, of reserve funds at the beginning of the statute. The Community Association Act and the Condo Act provide that a reserve fund is a fund that accumulates reserve funds. The acts define reserve funds as money to cover the cost of repairing, replacing, or restoring common areas and facilities that have a useful life of three years or more and a remaining useful life of less than 30 years, if the cost cannot reasonably be funded from the general budget or other funds of the association. See Utah Code §§ 57-8a-211(1) and 57-8-7.5(1). Thus, the term reserve funds is defined, and quite narrowly, but that is not the term used in subsection (9). Thus, "the purpose for which the reserve fund was established" can be and usually is much broader than the narrow definition of reserve funds in the acts. See footnote 3 to §§ 57-8a-211 and 57-8-7.5 for discussion on this issue.
Statutes and Cases:
(For reference: 57-8 is the Condo Act, 57-8a is the Community Association Act, 16-6a is the Nonprofit Act)