Reserve Study Requirements in South Dakota: Common Mistakes HOA Boards Make

Reserve Study Requirements in South Dakota: Common Mistakes HOA Boards Make

Many South Dakota HOA boards believe they can skip a reserve study because state law does not impose a blanket reserve study mandate. That assumption is a costly mistake. While South Dakota statutes do not require a formal reserve study in the way that California or Florida do, your board still carries fiduciary and disclosure duties that make one essential. Understanding what South Dakota law expects of you, and where most boards fall short, will help you avoid financial and legal trouble.

What South Dakota Law Actually Requires

South Dakota does not have a specific statute requiring associations to commission reserve studies at set intervals. This stands in contrast to states with detailed reserve mandates. However, South Dakota Codified Law Chapter 40 governs homeowner associations, and the fiduciary duty embedded in that framework means your board must act in the best interests of the community. That duty includes knowing your reserve funding status.

The South Dakota Attorney General's office, which oversees consumer protection and advises on HOA governance matters, has made clear that boards must disclose financial information to members honestly and completely. If your reserves are inadequate, members have a right to know. If you have not conducted a study, you cannot responsibly disclose that information.

The Common Mistake: Assuming No Statute Means No Obligation

The first and most dangerous mistake is interpreting "no mandate" as "no need." Your board is a fiduciary. That means you owe a legal duty of care to the association and its members. A reserve study is a standard tool for fulfilling that duty. Without one, you cannot know whether your reserves cover future capital repairs, whether your assessments are adequate, or whether you face a sudden special assessment.

The second mistake is confusing reserve study requirements with reserve funding requirements. Some boards think they can skip the study and just set aside money. That backwards approach leaves you unable to justify your reserve levels to members or to defend your budget decisions if questioned.

The third mistake is conducting a study once and never updating it. Conditions change. Components age. Replacement costs rise. A reserve study older than three years is stale and gives you false confidence.

Why This Matters in South Dakota

South Dakota has a concentrated metro area in the eastern part of the state, with Sioux Falls serving as the financial and administrative hub. Many HOA boards there manage communities with aging townhouses and condominiums built in the 1980s and 1990s, where roof, siding, and foundation work now commands premium costs due to labor shortages. A community manager in Sioux Falls managing 150 units found that a three year old reserve study had underestimated roof replacement costs by 40 percent because it had not accounted for recent labor rate increases and supply chain inflation. That board faced an emergency special assessment that could have been prevented with a current study.

What Your Board Should Do

First, hire a qualified reserve study professional to conduct a comprehensive study if you do not have one. The study should identify all common area components with a useful life of more than one year, estimate their remaining useful life, and project replacement costs.

Second, update your study every three years or whenever major renovations occur. This is not a box to check once; it is an ongoing fiduciary obligation.

Third, disclose your reserve funding percentage to members in your annual financial report. If your funding is below 70 percent, members need to know, and you need a plan to bring it up or explain why you believe it is adequate.

Fourth, use the reserve study to set realistic special assessments if needed. Do not surprise members with a large assessment because your reserves ran dry. A current study gives you time to communicate and budget.

Fifth, document that your board reviewed the study and discussed its findings. Minutes should reflect that the board understands its reserve position and has made conscious decisions about funding levels. This creates a paper trail showing fiduciary care.

Consult Your Attorney for Your Specific Situation

Reserve adequacy can involve complex questions about your community's actual condition, local building costs, and member expectations. Consult your attorney for your specific situation, particularly if your association is considering a special assessment, if members are questioning reserve levels, or if you are unsure whether your current study is adequate.

Next Steps

South Dakota law gives boards flexibility, but that flexibility comes with responsibility. A reserve study is not optional; it is foundational to honest financial management. Manorway's AI assisted governance platform can help you track reserve study completion dates, flag when updates are due, and keep financial disclosures organized so your board meets its fiduciary obligations consistently. Talk to your board about scheduling a reserve study this quarter, and let governance tools handle the coordination and reminders.