Hawaii Administrative Rules
Title 16 - DEPARTMENT OF COMMERCE AND CONSUMER AFFAIRS
Chapter 107 - RULES RELATING TO HORIZONTAL PROPERTY REGIMES, CHAPTER 514A, HAWAII REVISED STATUTES
Subchapter 6 - REQUIREMENTS FOR REPLACEMENT RESERVES
Section 16-107-64 - Transitional rules for full replacement reserves for existing associations prior to January 1, 2000

(a) Prior to January 1, 2000, an existing association shall collect at least fifty per cent of a full replacement reserve in its reserve account; and prior to the budget year beginning in 1997, an existing association shall collect at least twenty-five per cent of the amount which the association's replacement reserve study indicates will be a full replacement reserve for the association on January 1, 2000. Moreover, in the 1994 operating budget and in each succeeding annual operating budget prior to January 1, 2000, an existing association shall clearly disclose:

(b) In calculating a full replacement reserve for an existing asset, an association may disregard the actual age of the existing asset on January 1, 1994. Instead, the association may assume the estimated age of the existing asset on January 1, 1994 is zero and that the asset's estimated useful life is the same as its estimated remaining life on that date.

(c) An existing association whose budget year begins after January 1, 1993 may have up to six additional months beyond the dates given in this section to budget and assess for replacement reserves, provided the association collects fifty per cent of its full replacement reserves by January 1, 2000.

Example:

An existing association's reserve study indicates that a full replacement reserve for the association on January 1, 2000, will be $200,000, so the law requires the association to have at least fifty per cent of that amount, the minimum replacement reserve, or $100,000, by that date. If the association has no replacement reserve on January 1, 1994, this section requires the association to fully disclose how much of the $200,000 the association intends to collect each budget year prior to January 1, 2000. Moreover, the association must collect at least $50,000 by January 1, 1997, and will have to collect sufficient funds thereafter to ensure the minimum replacement reserve is collected by January 1, 2000. The rule permits the association to collect $50,000 during 1996 and $50,000 during 1999, provided the association fully discloses its intent.

Example:

An existing asset which has an estimated useful life of thirty years, is already twenty years old on January 1, 1994, and has a replacement cost of $100,000. Under the standard method of calculation, on December 31, 1994, a full replacement reserve for that asset would be $70,000 ($100,000 x 21/30 - see the definition of full replacement reserve). If an association had not already established a replacement reserve for that asset, the amount required to establish a full replacement reserve by December 31, 1994, would be $70,000. (Note, however, that to establish the minimum replacement reserve - fifty per cent of a full replacement reserve - would require only $35,000). The estimated replacement reserves for each of the next nine years would be $3,333 ($30,000 divided by 9) to collect a full replacement reserve by the end of the year 2003, or fifty per cent of that amount ($1,666) each year for statutory replacement reserves.

If the association adopts the method of calculation permitted by subsection (b), the full replacement reserve amount required by December 31, 1994, for the same asset would be only $10,000 ($100,000 x 1/10), or $5,000 for the minimum replacement reserve. Each subsequent year, however, the estimated replacement reserves will be $10,000 ($90,000 divided by 9) - higher than in the first example - because the method of calculation permitted by subsection (b) requires annual contributions to be higher to meet funding requirements. The statutory replacement reserves for each of the same nine years will be $5,000.