Understanding Mandatory Reserve Requirements in Maryland

What are Maryland Developers’ Responsibilities for Condo and Homeowners Associations Amid Legislation Changes?

By Brian D. Bichy

Back in the 2022 Maryland legislative session, mandatory reserve requirements were passed that applied statewide to all condominium and homeowners associations. Not only did these reserve requirements apply to existing condominium and homeowners associations, but the legislation also applied to newly formed associations before control transitioned to homeowners.

A developer-controlled board of directors (board) must take certain actions prior to transition or risk being in violation of the Maryland Condominium Act (MD Condo Act) or the Maryland Homeowners Association Act (MD HOA Act). These actions include:

• For condominiums, the board must obtain an initial independent reserve study at least 30 days prior to the transition meeting.
• For homeowners associations, the board must obtain an initial independent reserve study not more than 90 days and not less than 30 days prior to the transition meeting.
• For both condominiums and homeowners associations, the developer must ensure the replacement reserve at the time of transition is equal to the reserve funding recommended in the initial independent reserve study. This makes it vital that the developer (with assistance from its management company) initially prepare a realistic budget that includes funding for sufficient reserves so that at transition, there is not a large shortfall that potentially must be made up by the developer.

Prior to establishment of these reserve requirements, most community governing documents required that a reserve be maintained, but there was no specific amount or standard utilized. Also, although independent reserve studies were encouraged, they were not required and certainly not as early as prior to the transition meeting.

This legislation has changed the landscape regarding how reserves are handled. As newer projects begin to sell homes and move closer to the transition meeting, the developer must avoid being caught with its pants down and risk noncompliance, including such missteps as:

• Failing to secure a reserve study specialist to perform the inspection and prepare the independent reserve study in a timely manner. The reserve legislation includes requirements for the company performing the reserve study, so the developer cannot hire just any construction or engineering consultant to prepare the study. Planning is important because, as one can imagine, these reserve study companies are quite busy and it is important to get on their schedule.
• Preparing an unrealistic initial budget that does not adequately fund the reserve. As noted above, a developer does not want to prepare to transition the community and discover its reserve is insufficient based on the independent reserve study.

Timing is important to ensure developers remain compliant with the new reserve requirements under the MD Condo Act and the MD HOA Act. Thus, adequate planning for the timing of the transition meeting is vital. It is noteworthy that the transition meeting occurs at different times for a condominium under the MD Condo Act, as compared to a homeowners association under the MD HOA Act.

The transition meeting for a condominium must be held within 60 days from the date that 50% of the votes in the condominium have been conveyed from the developer to members of the public. In comparison, the transition meeting for a homeowners association must be held within 60 days from the date that 75% of the total number of lots that may be part of the development after all phases are complete are sold to members of the public.

Reserves can no longer be an after-thought for developers or simply a matter of plugging in a percentage of the total budget. There must be sufficient planning and consultation with the developer’s consultants, including its engineers, building construction contractors and management company, to ensure a smooth transition to the homeowners and to ensure compliance with the recently adopted reserve requirements.

If you have concerns, questions, or needs relating to the mandatory reserve requirements for Maryland condominium or homeowner associations, please contact Brian Bichy at bbichy@sgrwlaw.com.