Navigating Maryland’s House Bill 107: Condo Owners’ Financial Challenges

Numerous Ocean City condominium proprietors are now grappling with substantial financial obligations in the range of five to six figures over the next several years as they rush to meet a new state law’s deadline. This law necessitates that associations allocate funds for maintenance, repairs, and replacements, commonly referred to as “House Bill 107,” also known as the “reserve study” or “capital reserve fund” law.

This legislation was enacted in April 2022 and became effective on October 1 of the same year. It mandated that condominiums, housing associations, cooperatives, and homeowners’ associations in Maryland must complete a reserve study by October 1, 2023.

A reserve study entails an evaluation of the state of a shared building and an assessment of the costs associated with repairing or replacing the structure and utilities.

For any association with common assets valued at a minimum of $10,000, and that has not conducted a reserve study since October 1, 2018, a third-party building auditing firm must have conducted the study as of the beginning of the current month. In these studies, the firm calculates the costs for all necessary work and recommends the annual amount that an association must allocate to a reserve fund.

Associations have a three-year window to meet the recommended funding level for the reserve fund and must maintain that amount each year, replenishing any funds spent on building updates. Additionally, the law mandates that associations update their reserve studies every five years and fund their reserves accordingly.

This legislation was pushed forward by Maryland lawmakers following the tragic 2021 collapse of the Champlain Towers South condominium in Surfside, Florida, which resulted in the loss of 98 lives. The disaster was attributed to weaknesses in the original construction and a lack of structural maintenance over the years. Currently, 12 states, including Maryland, Florida, Delaware, and Virginia, require reserve funding for homeowners’ associations.

Condo associations face a distinct challenge due to the shared infrastructure and amenities among condo owners. In contrast, homeowners’ associations typically have a few shared assets, such as a clubhouse, pool, or garden.

Many local associations have received their reserve study results, and for some, the costs are so high that increasing regular condo fees will not suffice. Filling the recommended reserve funds will require additional payments, which resident associations can impose on owners through “special assessments” when a building requires a substantial infusion of funds.

Cynthia Mooney, the president of Shore Management, which manages several condo associations in Ocean City, shared an example where an 80-unit Ocean City condo’s residents are facing a $2.75 million bill following a reserve study. This cost, covered by a special assessment, will be divided among condo owners, with larger units paying a larger share.

While the new law places a financial burden on many condo associations, it also compels them to address long-neglected infrastructure issues. It serves as a wakeup call to ensure the safety and integrity of shared properties.

Igor Conev, the CEO of Mann Properties, which manages numerous properties in and around Ocean City, indicated that condo associations may need to allocate significant sums annually to fill their reserve funds. In some cases, associations may opt for a smaller contribution to the fund now and implement a larger special assessment closer to the deadline.

The law has effectively changed the guidelines for funding reserve funds, requiring associations to allocate a more substantial percentage of their budget to reserves, typically around 25-30%. The law also grants associations the authority to raise fees or assessments beyond what their bylaws may have set as a maximum.

While some buildings may have already undergone repairs, the “replacements” portion of the reserve study law can still incur substantial costs. Unit owners may need to shoulder these expenses through special assessments and potential future fee increases.

Many unit owners, like Ken Balle, feel blindsided by the law and believe that there should have been more widespread public awareness of its implications. Although the law does not specify penalties for not meeting the three-year deadline or provide a monitoring institution, it has significantly reshaped how condominium associations in Maryland manage their finances.

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