By: John S. Morlu II, CPA
Homeowners Associations (HOAs) play a vital role in maintaining the shared amenities and infrastructure of their communities. A critical part of that responsibility is managing reserve funds—dedicated savings for major repairs, replacements, and unforeseen expenses. Properly funding and using these reserves helps protect the community’s long-term sustainability and financial health.
This article explains what HOA reserve funds should cover, common pitfalls to avoid, and how to align with industry best practices.
What Are Reserve Funds?
Reserve funds are financial accounts established by HOAs to set aside money for significant, non-recurring expenses. These funds are separate from the HOA’s operating budget, which covers daily maintenance and administrative costs.
Key Characteristics of Reserve Funds
- Planned savings: Reserve funds are accumulated through regular homeowner assessments, typically determined by an annual budget and reserve study.
- Specific purpose: These funds are designated for major repairs, replacements, or restoration of common property elements with a limited lifespan.
- Legally mandated: Many states require HOAs to maintain reserve funds and conduct reserve studies to ensure adequate funding for future expenses.
What Should Reserve Funds Cover?
Reserve funds are intended for capital expenses—substantial repairs, replacements, or upgrades to shared property components. According to industry standards, these expenses should generally meet the following criteria:
- Non-recurring: The expense is not part of routine maintenance.
- Significant cost: The cost exceeds what could reasonably be covered by the operating budget.
- Community-wide impact: The component benefits all residents or affects shared property.
Examples of Eligible Reserve Fund Expenses
1. Structural Repairs
- Roof replacements for clubhouses, shared buildings, or community centers.
- Foundation repairs for shared structures.
- Balcony or deck replacements in condominiums or townhouses.
2. Infrastructure Projects
- Resurfacing roads, parking lots, and sidewalks.
- Repairing or replacing storm drains, sewer lines, or irrigation systems.
- Upgrading street lighting or electrical systems in shared areas.
3. Recreational Facilities
- Pool resurfacing or replacing filtration systems.
- Tennis court resurfacing and repairs.
- Playground equipment replacement.
4. Mechanical Systems
- Replacing HVAC systems in shared facilities.
- Elevator repairs or replacements.
- Major plumbing or electrical upgrades.
5. Shared Furnishings
- Renovating clubhouses, including new flooring, furniture, or fixtures.
- Replacing fitness equipment in shared gyms.
6. Emergency Repairs
- Addressing storm damage to shared property.
- Repairing failed mechanical systems, such as community-wide HVAC units or water pumps.
Interesting tidbit: Communities with well-funded reserves often report fewer financial disputes among homeowners, because these funds reduce the likelihood of surprise special assessments for large expenses.
What Reserve Funds Should NOT Cover
Reserve funds are not a catch-all for any community expense. Misusing these funds for ineligible items can create shortfalls and may carry legal consequences.
Examples of Ineligible Expenses
1. Routine Maintenance and Minor Repairs
- Pool cleaning or chemical treatments.
- Lawn care and landscaping.
- Painting walls or fences.
2. Daily Operating Costs
- Utility bills for common areas.
- Staff salaries or management fees.
- Office supplies or meeting costs.
3. Private Property Repairs
- Repairs to exclusive-use areas like individual driveways or patios.
- Maintenance of homeowner-owned equipment.
4. Non-Capital Improvements
- Adding new amenities not outlined in the governing documents.
- Cosmetic upgrades, such as decorative landscaping.
Best practice: Always consult the HOA’s governing documents and reserve study to confirm appropriate uses for reserve funds.
How Are Reserve Funds Determined?
The amount an HOA should have in reserve is determined by a reserve study, typically conducted by a professional. This study evaluates the condition of shared assets, estimates their remaining lifespan, and calculates the funding needed for future repairs or replacements.
Key Components of a Reserve Study
- Inventory of common area components: Identifies all shared assets, such as roofs, roads, and pools.
- Condition assessment: Evaluates the current state of each component.
- Cost estimation: Projects the cost of repairs or replacements over the next 20–30 years.
- Funding plan: Recommends how much the HOA should contribute annually to meet future needs.
Industry standard: Reserve funds are often advised to be at least 70% funded to support financial stability, according to the Community Associations Institute (CAI).
Best Practices for Managing Reserve Funds
- Maintain separate accounts: Keep reserve funds separate from operating funds to avoid commingling and ensure proper tracking.
- Follow governing documents: Use reserve funds only for purposes outlined in the HOA’s governing documents and applicable state laws.
- Update reserve studies regularly: Conduct a new reserve study every 3–5 years to reflect changing conditions, inflation, and unexpected repairs.
- Transparency and communication: Provide homeowners with clear reporting on the reserve fund’s status, contributions, and projected expenses.
- Board approval: Require board approval for all reserve fund expenditures, with clear documentation in meeting minutes.
Interesting tidbit: Well-maintained reserves not only prevent financial crises but can also enhance property values, because potential buyers often view well-funded HOAs as a sign of a stable community.
The Consequences of Underfunded Reserves
Failing to maintain adequate reserves can lead to serious consequences:
- Special assessments: Homeowners may face unexpected, large one-time fees to cover funding shortfalls.
- Deferred maintenance: Delaying major repairs can increase costs over time as deterioration accelerates.
- Legal risks: Mismanagement of reserve funds can lead to disputes and lawsuits against the board.
Industry insight: According to a CAI survey, over 70% of HOAs with insufficient reserves rely on special assessments, which can create financial strain for residents.
Conclusion: Responsible Reserve Fund Management Is Essential
Reserve funds are the financial safety net of an HOA. They help communities handle significant repairs and replacements without imposing sudden financial burdens on homeowners. By following best practices, conducting reserve studies regularly, and maintaining transparency, HOAs can protect their financial health and strengthen trust among residents.
Properly managed reserve funds are not just a fiscal necessity—they are a commitment to the long-term stability, safety, and value of the community. With careful planning and responsible governance, HOAs can avoid financial pitfalls and help their neighborhoods thrive for years to come.
Author: John S. Morlu II, CPA
John S. Morlu II, CPA, is the CEO and Chief Strategist of JS Morlu, a globally acclaimed public accounting and management consulting powerhouse. With his visionary leadership, JS Morlu has redefined industries, pioneering cutting-edge technologies across B2B, B2C, P2P, and B2G landscapes.
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