Understanding Maryland HOA reserve requirements

What are HOA reserves?

HOA reserves are funds an association sets aside for future major repairs and replacements of common areas. In Maryland, this can include roads, roofs, stormwater facilities, clubhouses, pools, sidewalks, mechanical systems, electrical components, plumbing systems, and other shared assets the HOA is responsible for maintaining.
 

What is a reserve fund?

A reserve fund is the account where an HOA saves money for future capital repairs and replacements. This is different from the operating budget, which usually pays for recurring expenses like landscaping, insurance, management, utilities, maintenance, and routine services.
 

What is a reserve study?

A reserve study is a planning tool that identifies the common area components an HOA must repair or replace, estimates their remaining useful life, estimates future repair or replacement costs, and recommends how much the association should contribute to reserves each year.
 

Maryland HOA reserve requirements

There are a few key Maryland HOA reserve requirements under the Maryland Homeowners Association Act:

• Many Maryland HOAs must complete reserve studies: Maryland HOA reserve requirements generally apply when the HOA is responsible under its declaration for maintaining and repairing common areas, and the total repair or replacement costs of the covered components are at least $10,000. Associations that issue bonds for capital expenditures are excluded (Md. Code, Real Prop. § 11B-112.3(b)).
   
• Reserve studies must be updated at least every 5 years: After the initial reserve study, the governing body must have an updated reserve study completed within 5 years and at least every 5 years after that (Md. Code, Real Prop. § 11B-112.3(c)(3), (d)).
   
• Qualified professionals must prepare the study: A required reserve study must be prepared by someone who meets Maryland’s statutory qualifications, such as a licensed architect, licensed professional engineer, Reserve Specialist, Professional Reserve Analyst, or another qualifying person (Md. Code, Real Prop. § 11B-112.3(e)).
   
• Boards must develop a reserve funding plan: The governing body must develop a funding plan in consultation with a qualified reserve study professional and use an accepted funding method, such as the component method, cash flow method, baseline funding method, or threshold cash flow method (Md. Code, Real Prop. § 11B-112.3(f)).
   
• Reserve funding must align with the reserve study, subject to legal exceptions: The annual budget must provide for reserves in an amount recommended in the most recent reserve study or updated reserve study, or reach that amount within 5 fiscal years if it was the initial reserve study, with certain financial hardship and funding plan provisions (Md. Code, Real Prop. §§ 11B-112.2(d), 11B-112.3(f)).

Determine the benefits of Maryland association reserve funding

The key to protecting the fiscal health of your community is committing to the consistent funding of your reserve fund over time. By doing so, you will create the foundation for healthy HOA reserve funds and your association will realize three distinct benefits:

• Peace of mind: A reserve fund can help give association members greater confidence that money will be there when it is needed.
   
• Market value preservation: When reserves exist to support shared assets in a community, the market value of properties within that community can be better protected.
   
• Equitable cost participation: One of the main advantages of establishing and maintaining a reserve fund is that residents who are using and enjoying community assets are contributing to their costs. Without reserves, a special assessment may be needed, whereby only those residents who are living in your community at the time an asset needs to be replaced would be impacted. By funding reserves over time, generations of owners can share in the costs of assets.

Maryland HOA laws, along with your governing documents, will help determine if a reserve fund must be established for your community. A good property management company will offer guidance on establishing and maintaining funding of your reserves and understanding Maryland HOA reserve requirements. At FirstService Residential, it is an essential component of the support we offer communities for successful, long-term financial planning.
 

Determine maintenance vs. reserve components

Properly categorizing your community’s common area components is one of the challenges that comes with managing reserves. Some items will require regular maintenance, such as pressure washing sidewalks and window cleaning, while others will need to be replaced, like roofs and mechanical equipment, and still others will require both, such as pools and carpeting.

To keep your community components in working order until they are due to be replaced, you must budget for maintenance costs every year. If you don’t, you may end up having to replace them before the reserve study’s replacement due date and impose a special assessment or take out a loan.

Deciding whether items are maintenance vs. replacement (or both) will ultimately determine if they will be listed in your annual operating budget or as part of your reserve inventory. Usually, less expensive items are included in the operating budget, and costlier items are assigned as reserve components so their replacement costs can be financed over a longer time period. If you need help determining whether an item should be included in your operating budget or reserve inventory, consult with your auditor or property management company.

More and more associations, especially for communities that are decades old, are starting to address infrastructure components as part of their budget planning process as well. These are components that last a very long time, are generally out of sight and as such, are not often thought of — like sewers. A good practice to support compliance with Maryland HOA reserve requirements is to add infrastructure items to your reserve components list when they reach the halfway mark of their expected life spans.
 

About FirstService Residential

As North America’s leading property management company, FirstService Residential serves Maryland communities with local expertise backed by national resources. Our teams support board members with running meetings, recordkeeping, financial management, banking and insurance programs, resident communication, and 24/7 customer care teams. This way, board members can focus on long-term goals instead of day-to-day administration.

With over 25 years of experience across the state, we help HOAs, condo associations, high-rises, and master-planned communities operate smoothly and meet their goals with confidence. To learn how we can support your association with Maryland HOA reserve requirements, contact our Maryland team today.

This information is provided for general informational purposes only and is not intended to constitute, and should not be relied upon as, legal, regulatory, financial, or operational advice, or as a representation or guarantee of any specific services, capabilities, or outcomes. Property management needs, regulatory requirements, market conditions, and available services vary by jurisdiction, property type, and community. FirstService Residential provides services through locally based affiliates and associates, and services and results may vary by community, region, contractual terms, and applicable law.