Written by Chris Majerle, PCAM on July 23, 2020

For many years, I have warned that a day would come when reserve studies and reserve funding would be required by law because association members and association boards were unwilling to raise assessments to adequately prepare for the inevitable need to replace components of our condominium, cooperative and HOA infrastructures. Our communities are crumbling into a state of decay with hazardous balconies, leaking roofs, deteriorated parking lots, old pipes, boilers and chillers, and the list goes on.

Well, that day is coming in Prince George’s County and it is October 1, 2020. Stay tuned—This will eventually become State-wide (a prediction—I am told a legislator intends to re-introduce the bill for State-wide consideration in the next legislative session).

The 2020 Maryland Legislature passed House Bill 254 unanimously in both the House and Senate, and the Governor allowed it to become law (no signature, but no veto). Keep reading for a synopsis of the bill. (See the full text of the bill here)

In a nutshell, any community that has had a reserve study since October 1, 2016, MUST refer to the study and MUST include the recommended funding level in the annual budget. Period. If your association has not had a study since that date, you must have one conducted before October 1, 2021. In any case, you MUST fund at least the amount recommended in your most recent reserve study. If no study has ever been performed, you may view this as a reprieve and kick the can further down the road, but a delay in increasing funding will only mean a larger increase next year when you MUST have the study (by October 1, 2021) and fully fund in your 2022 budget.

You must make the reserve study available to the members and your proposed budget must include a summary of the reserve study and funding.

If your governing documents cap the annual increase on assessments, that cap is invalidated by this law with respect to the increase required to fully fund reserves. For example, if your regular budgeting process indicates a need to increase by 2%, but your reserve funding requires an additional 20% increase and your governing documents say you can’t exceed a 10% increase, you may still increase by 22% without member approval.

The 2021 budget (adopted in 2020) is when this begins.

There Are Some Unclear Aspects To The Law

  • Most reserve Studies include at least two versions of funding: Cash Method and Component Method. It does not say which, so the Board may elect either or something in between.
  • What happens if you fail to comply? Presumably, since you have a fiduciary duty to manage your association legally, you would be in breach of your fiduciary duty and that may open the door to personal liability—liability to every homeowner who suffers from malfunctioning equipment, inability to rent or sell due to property condition or any injury suffered due to improperly maintained components.

There is one more major aspect to this new law, again just for Prince George’s County at this time. That is, developers of HOAs, condominiums and cooperatives, new construction or conversion, are required to have a professional study conducted before turning the community over to the owners and must FULLY fund reserves. This means no more conversions of 40-, 50- and 60-year-old-buildings where the developer puts a coat of paint on a pig and sells a sickly pig to unsuspecting, often young and struggling first-time buyers, who soon learn that millions of dollars worth of building components had exceeded expected life and should have been replaced. Now, those new homeowners must find a way to raise thousands or hundreds of thousands of dollars or face condemnation. The developers will either make the replacements or leave the money behind to help the buyers cover the cost. And, this provision of the law allows aggrieved parties to file complaints with the Division of Consumer Protection of the Office of the Attorney General where any lawsuit may include an award of the plaintiff’s legal fees. This may be the answer to the board’s liability for failing to comply with the law, as well.

Again, this only applies to Prince Georges County communities right this moment, but communities in other counties should take notice and perhaps begin making preparation to comply.