The state of California has adopted specific statutes related to reserve studies, which are set forth in Davis-Stirling Common Interest Development Act, Civil Code Section 1365 and its sub parts. Those statutes generally state the requirements for conducting reserve studies, managing reserve funds and making disclosures to owners regarding said funding. These requirements include a reserve study being conducted once every three years that involves those items which the association is obligated to repair, replace, restore or maintain, This study must identify those items with less than a 30 year useful life, estimate the probable remaining useful life, and estimate the cost of repair, restore, replace or maintain.

While a reserve study is obligated to be performed, California law does not require funding to the reserve accounts. Common industry practice is that homeowners associations should perform periodic reserve studies as a prudent business practice. Directors of associations are generally held to a “prudent businessman” rule in determining whether or not they have met the fiduciary duty of their position for the association. A prudent businessman would establish a capital replacement budget (reserve study) to make sure he is generating enough revenues (reserve assessments) to provide for major repairs and replacements