SB 1046: Real Estate Commission; Condominium Associations; Condominiums; Managing Agents; Unit Owners; Reporting

A BILL FOR AN ACT

RELATING TO CONDOMINIUMS.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

     SECTION 1.  The purpose of this Act is to require that certain managing agents report to condominium unit owners and the real estate commission when a condominium association that the agent manages fails to comply with budget and replacement reserves requirements.

     SECTION 2.  Section 514B-148, Hawaii Revised Statutes, is amended to read as follows:

     "§514B-148  Association fiscal matters; budgets and replacement reserves.  (a)  The budget required under section 514B-144(a) shall include a summary with at least the following details:

     (1)  The estimated revenues and operating expenses of the association;

     (2)  Disclosure as to whether the budget has been prepared on a cash or accrual basis;

     (3)  The estimated costs of fire safety equipment or installations that meet the requirements of a life safety evaluation required by the applicable county for any building located in a county with a population greater than five hundred thousand; provided that the reserve study may forecast a loan or special assessment to fund life safety components or installation;

     (4)  The balance of the total replacement reserves fund of the association as of the date of the budget;

     (5)  The estimated replacement reserves assessments that the association will require to maintain the property based on a reserve study performed by or on behalf of the association; provided that the reserve study, if not prepared by an independent reserve study preparer, shall be reviewed by an independent reserve study preparer not less than every three years; provided further that a managing agent with industry reserve study designations shall not be considered as having a conflict of interest for purposes of this paragraph;

     (6)  A general explanation of how the estimated replacement reserves assessments are computed and detailing:

          (A)  The identity, qualifications, and potential conflicts of interest of the person or entity performing the reserve study, update, or any review thereof;

          (B)  Disclosure of any component of association property omitted from the reserve study and the basis for the omission;

          (C)  Planned increases in the estimated replacement reserve assessments over the thirty-year plan; and

          (D)  Whether the actual estimated replacement reserves assessments for the prior year as defined in the study was less than the assessments provided for in the reserve study, and, if so, by how much, and explaining the impact of the lesser assessments on future estimated replacement reserves assessments;

     (7)  The amount the association must collect for the fiscal year to fund the estimated replacement reserves assessments; and

     (8)  Information as to whether the amount the association must collect for the fiscal year to fund the estimated replacement reserves assessments was calculated using a per cent funded or cash flow plan.  The method or plan shall not circumvent the estimated replacement reserves assessments amount determined by the reserve study pursuant to paragraph (5).

     (b)  The association shall assess the unit owners to either fund a minimum of fifty per cent of the estimated replacement reserves assessments or fund one hundred per cent of the estimated replacement reserves assessments when using a cash flow plan; provided that a new association need not collect estimated replacement reserves assessments until the fiscal year that begins after the association's first annual meeting.  For each fiscal year, the association shall collect the amount assessed to fund the estimated replacement reserves assessments for that fiscal year, as determined by the association's plan.

     (c)  The association shall compute the estimated replacement reserves assessments by a formula that is based on the estimated life and the estimated capital expenditure or major maintenance required for each part of the property.  The estimated replacement reserves assessments shall include:

     (1)  Adjustments for revenues that will be received and expenditures that will be made before the beginning of the fiscal year to which the budget relates; and

     (2)  Separate, designated reserves for each part of the property for which capital expenditures or major maintenance will exceed $10,000.  Parts of the property for which capital expenditures or major maintenance will not exceed $10,000 may be aggregated in a single designated reserve.

     (d)  No association or unit owner, director, officer, managing agent, or employee of an association who makes a good faith effort to calculate the estimated replacement reserves assessments for an association shall be liable if the estimate subsequently proves incorrect.

     (e)  Except in emergency situations or with the approval of a majority of the unit owners, a board may not exceed its total adopted annual operating budget by more than twenty per cent during the fiscal year to which the budget relates.  Before imposing or collecting an assessment under this subsection that has not been approved by a majority of the unit owners, the board shall adopt a resolution containing written findings as to the necessity of the extraordinary expense involved and why the expense was not or could not have been reasonably foreseen in the budgeting process, and the resolution shall be distributed to the members with the notice of assessment.

     (f)  The requirements of this section shall override any requirements in an association's declaration, bylaws, or any other association documents relating to preparation of budgets, calculation of replacement reserve requirements, assessment and funding of replacement reserves, and expenditures from replacement reserves with the exception of:

     (1)  Any requirements in an association's declaration, bylaws, or any other association documents that require the association to collect more than fifty per cent of replacement reserve requirements; or

     (2)  Any provisions relating to upgrading the common elements, [such as] including additions, improvements, and alterations to the common elements.

     (g)  Subject to the procedures of section 514B‑157 and any rules adopted by the commission, any unit owner whose association board fails to comply with this section may enforce compliance by the board.  In any proceeding to enforce compliance, a board that has not prepared an annual operating budget and reserve study shall have the burden of proving it has complied with this section.

     (h)  Subject to any rules adopted by the commission, any managing agent whose client is an association subject to this chapter shall notify in writing:

     (1)  Each unit owner of the association; and

     (2)  The real estate commission,

if the association being managed by the managing agent fails to comply with this section; provided that this subsection shall only apply to a managing agent whose contract involves budgetary and replacement reserve responsibilities and provides authority for the managing agent to correspond with the unit owners.

     [(h)  As used in] (i)  For the purposes of this section:

     "Capital expenditure" means an expense that results from the purchase or replacement of an asset whose life is greater than one year, or the addition of an asset that extends the life of an existing asset for a period greater than one year.

     "Cash flow plan" means a minimum thirty-year projection of an association's future income and expense requirements to fund fully its replacement reserves requirements each year during that thirty-year period, except in an emergency; provided that it does not include a projection of special assessments or loans during that thirty-year period, except in an emergency.

     "Emergency situation" means any extraordinary expenses:

     (1)  Required by an order of a court;

     (2)  Necessary to repair or maintain any part of the property for which the association is responsible where a threat to personal safety on the property is discovered;

     (3)  Necessary to repair any part of the property for which the association is responsible that could not have been reasonably foreseen by the board in preparing and distributing the annual operating budget;

     (4)  Necessary to respond to any legal or administrative proceeding brought against the association that could not have been reasonably foreseen by the board in preparing and distributing the annual operating budget; or

     (5)  Necessary for the association to obtain adequate insurance for the property that the association must insure.

     "Independent reserve study preparer" means any organization, company, or individual with a reserve study certification from an industry organization.

     "Major maintenance" means an expenditure for maintenance or repair that will result in extending the life of an asset for a period greater than one year.

     "Replacement reserves" means funds for the upkeep, repair, or replacement of those parts of the property, including but not limited to roofs, walls, decks, paving, and equipment, that the association is obligated to maintain."

     SECTION 3.  Statutory material to be repealed is bracketed and stricken.  New statutory material is underscored.

     SECTION 4.  This Act shall take effect on July 1, 2050.

Report Title:

Real Estate Commission; Condominium Associations; Condominiums; Managing Agents; Unit Owners; Reporting

Description:

Requires certain managing agents to notify each unit owner and the Real Estate Commission when a condominium association that the agent manages fails to meet budget and replacement reserves reporting requirements.  Effective 7/1/2050.  (SD1)

The summary description of legislation appearing on this page is for informational purposes only and is not legislation or evidence of legislative intent.

A BILL FOR AN ACT

relating to condominiums.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

     SECTION 1.  The purpose of this Act is to require that a managing agent report to condominium unit owners and the real estate commission when a condominium association that the agent manages fails to comply with budget and replacement reserves requirements.

     SECTION 2.  Section 514B-148, Hawaii Revised Statutes, is amended to read as follows:

     "§514B-148  Association fiscal matters; budgets and replacement reserves.  (a)  The budget required under section 514B-144(a) shall include a summary with at least the following details:

     (1)  The estimated revenues and operating expenses of the association;

     (2)  Disclosure as to whether the budget has been prepared on a cash or accrual basis;

     (3)  The estimated costs of fire safety equipment or installations that meet the requirements of a life safety evaluation required by the applicable county for any building located in a county with a population greater than five hundred thousand; provided that the reserve study may forecast a loan or special assessment to fund life safety components or installation;

     (4)  The balance of the total replacement reserves fund of the association as of the date of the budget;

     (5)  The estimated replacement reserves assessments that the association will require to maintain the property based on a reserve study performed by or on behalf of the association; provided that the reserve study, if not prepared by an independent reserve study preparer, shall be reviewed by an independent reserve study preparer not less than every three years; provided further that a managing agent with industry reserve study designations shall not be considered as having a conflict of interest for purposes of this paragraph;

     (6)  A general explanation of how the estimated replacement reserves assessments are computed and detailing:

          (A)  The identity, qualifications, and potential conflicts of interest of the person or entity performing the reserve study, update, or any review thereof;

          (B)  Disclosure of any component of association property omitted from the reserve study and the basis for the omission;

          (C)  Planned increases in the estimated replacement reserve assessments over the thirty-year plan; and

          (D)  Whether the actual estimated replacement reserves assessments for the prior year as defined in the study was less than the assessments provided for in the reserve study, and, if so, by how much, and explaining the impact of the lesser assessments on future estimated replacement reserves assessments;

     (7)  The amount the association must collect for the fiscal year to fund the estimated replacement reserves assessments; and

     (8)  Information as to whether the amount the association must collect for the fiscal year to fund the estimated replacement reserves assessments was calculated using a per cent funded or cash flow plan.  The method or plan shall not circumvent the estimated replacement reserves assessments amount determined by the reserve study pursuant to paragraph (5).

     (b)  The association shall assess the unit owners to either fund a minimum of fifty per cent of the estimated replacement reserves assessments or fund one hundred per cent of the estimated replacement reserves assessments when using a cash flow plan; provided that a new association need not collect estimated replacement reserves assessments until the fiscal year that begins after the association's first annual meeting.  For each fiscal year, the association shall collect the amount assessed to fund the estimated replacement reserves assessments for that fiscal year, as determined by the association's plan.

     (c)  The association shall compute the estimated replacement reserves assessments by a formula that is based on the estimated life and the estimated capital expenditure or major maintenance required for each part of the property.  The estimated replacement reserves assessments shall include:

     (1)  Adjustments for revenues that will be received and expenditures that will be made before the beginning of the fiscal year to which the budget relates; and

     (2)  Separate, designated reserves for each part of the property for which capital expenditures or major maintenance will exceed $10,000.  Parts of the property for which capital expenditures or major maintenance will not exceed $10,000 may be aggregated in a single designated reserve.

     (d)  No association or unit owner, director, officer, managing agent, or employee of an association who makes a good faith effort to calculate the estimated replacement reserves assessments for an association shall be liable if the estimate subsequently proves incorrect.

     (e)  Except in emergency situations or with the approval of a majority of the unit owners, a board may not exceed its total adopted annual operating budget by more than twenty per cent during the fiscal year to which the budget relates.  Before imposing or collecting an assessment under this subsection that has not been approved by a majority of the unit owners, the board shall adopt a resolution containing written findings as to the necessity of the extraordinary expense involved and why the expense was not or could not have been reasonably foreseen in the budgeting process, and the resolution shall be distributed to the members with the notice of assessment.

     (f)  The requirements of this section shall override any requirements in an association's declaration, bylaws, or any other association documents relating to preparation of budgets, calculation of replacement reserve requirements, assessment and funding of replacement reserves, and expenditures from replacement reserves with the exception of:

     (1)  Any requirements in an association's declaration, bylaws, or any other association documents that require the association to collect more than fifty per cent of replacement reserve requirements; or

     (2)  Any provisions relating to upgrading the common elements, [such as] including additions, improvements, and alterations to the common elements.

     (g)  Subject to the procedures of section 514B‑157 and any rules adopted by the commission, any unit owner whose association board fails to comply with this section may enforce compliance by the board.  In any proceeding to enforce compliance, a board that has not prepared an annual operating budget and reserve study shall have the burden of proving it has complied with this section.

     (h)  Subject to any rules adopted by the commission, any managing agent whose client is an association subject to this chapter, shall notify in writing:

     (1)  Each unit owner whose association board fails to comply with this chapter; and

     (2)  The real estate commission.

     [(h)  As used in] (i)  For the purposes of this section:

     "Capital expenditure" means an expense that results from the purchase or replacement of an asset whose life is greater than one year, or the addition of an asset that extends the life of an existing asset for a period greater than one year.

     "Cash flow plan" means a minimum thirty-year projection of an association's future income and expense requirements to fund fully its replacement reserves requirements each year during that thirty-year period, except in an emergency; provided that it does not include a projection of special assessments or loans during that thirty-year period, except in an emergency.

     "Emergency situation" means any extraordinary expenses:

     (1)  Required by an order of a court;

     (2)  Necessary to repair or maintain any part of the property for which the association is responsible where a threat to personal safety on the property is discovered;

     (3)  Necessary to repair any part of the property for which the association is responsible that could not have been reasonably foreseen by the board in preparing and distributing the annual operating budget;

     (4)  Necessary to respond to any legal or administrative proceeding brought against the association that could not have been reasonably foreseen by the board in preparing and distributing the annual operating budget; or

     (5)  Necessary for the association to obtain adequate insurance for the property that the association must insure.

     "Independent reserve study preparer" means any organization, company, or individual with a reserve study certification from an industry organization.

     "Major maintenance" means an expenditure for maintenance or repair that will result in extending the life of an asset for a period greater than one year.

     "Replacement reserves" means funds for the upkeep, repair, or replacement of those parts of the property, including but not limited to roofs, walls, decks, paving, and equipment, that the association is obligated to maintain."

     SECTION 3.  Statutory material to be repealed is bracketed and stricken.  New statutory material is underscored.

     SECTION 4.  This Act shall take effect upon its approval.

Report Title:

Real Estate Commission; Condominium Associations; Condominiums; Managing Agents; Unit Owners; Reporting

Description:

Requires any managing agent to notify each unit owner and the Real Estate Commission when a condominium association that the agent manages fails to meet budget and replacement reserves reporting requirements.

The summary description of legislation appearing on this page is for informational purposes only and is not legislation or evidence of legislative intent.

STAND. COM. REP. NO. 803

Honolulu, Hawaii

RE:    S.B. No. 1046

       S.D. 1

Honorable Ronald D. Kouchi

President of the Senate

Thirty-Third State Legislature

Regular Session of 2025

State of Hawaii

Sir:

     Your Committee on Commerce and Consumer Protection, to which was referred S.B. No. 1046 entitled:

"A BILL FOR AN ACT RELATING TO CONDOMINIUMS,"

begs leave to report as follows:

     The purpose and intent of this measure is to require managing agents of condominium associations to report to condominium unit owners and the Real Estate Commission when the condominium association fails to comply with budget and replacement reserves requirements.

     Your Committee received testimony in support of this measure from the Hawaiʻi Association of REALTORS and two individuals.

     Your Committee received testimony in opposition to this measure from the Community Associations Institute, Palehua Townhouse Association, and eight individuals.

     Your Committee received comments on this measure from the Hawaiʻi Real Estate Commission and one individual.

     Your Committee finds that condominium association boards are required to adopt an annual budget and establish adequate reserve funds under state law governing condominiums.  Proper planning and disclosure of an annual budget is important to unit owners as it provides transparency, informed decision‑making, and opportunities for financial planning.  Replacement reserves are an essential part of an association's annual operating budget, and insufficient reserves can result in a condominium association board imposing burdensome special assessments, borrowing necessary funds, or even deferring necessary repairs.  This measure will encourage condominium associations to diligently comply with budget and replacement reserves requirements to allow owners to stay informed about potential financial issues.

     Your Committee has amended this measure by:

     (1)  Clarifying that a managing agent whose client is an association shall notify in writing all unit owners of the association and the Real Estate Commission if the association fails to comply with budgetary and replacement reserve responsibilities; provided that the managing agent's contract involves budgetary and replacement reserve responsibilities and provides authority for the managing agent to correspond with the unit owners;

     (2)  Amending section 1 to reflect its amendment purpose;

     (3)  Inserting an effective date of July 1, 2050, to encourage further discussion; and

     (4)  Making technical, nonsubstantive amendments for the purposes of clarity and consistency.

     As affirmed by the record of votes of the members of your Committee on Commerce and Consumer Protection that is attached to this report, your Committee is in accord with the intent and purpose of S.B. No. 1046, as amended herein, and recommends that it pass Second Reading in the form attached hereto as S.B. No. 1046, S.D. 1, and be placed on the calendar for Third Reading.

Respectfully submitted on behalf of the members of the Committee on Commerce and Consumer Protection,