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What You Need to Know About HOA Reserve Funds

What You Need to Know About HOA Reserve Funds

In past articles, we’ve talked some about HOA reserve funds, but mainly in the context of other overarching issues, such as the difference between reserve funds and operating funds. So today, let’s dive deeper into reserve funds to answer some common questions and shed some light on best practices around managing reserve funds.

What is an HOA Reserve Fund?

You can think of HOA reserve funds like a savings account or an emergency fund. It’s there if major repairs are needed and provides a safety net to ensure the community’s financial stability. When the reserve is adequately funded, special assessments may be less frequent as the money will be there to cover whatever expenses may come up.

A percentage of your HOA fees go into the reserve. This practice makes it fair for all residents as they contribute equally towards upkeep costs, upgrades, etc. When reserve funds are well-managed, the community always has enough to keep the property in tip-top shape. A well-maintained community enjoys higher property values, which is good for everyone, especially when you decide to sell.

Is There a Standard Funding Percentage for HOA Reserves?

There is no standard for how much of your HOA fees go into the reserve. Generally, it can be anywhere from 15% to 40% of your monthly assessment, but that may change periodically as needs are reviewed.

Reserve studies usually take place annually and are conducted to determine a property’s long-term maintenance needs. HOA funding percentages are established based on cost estimates over a period of time. A specialist, such as a reserve professional or an engineer with experience in this area, usually completes these studies.

In California, reserve studies are required every three years. Communities may conduct them more frequently, but if the property is in good shape, it’s generally unnecessary.

Much like businesses project their future sales or individuals invest in funds for their retirement; a reserve fund is a best practice that underscores responsible community management and provides peace of mind for residents. When the reserve is adequately funded, there are no worries about whether there’s enough money for roof repairs, new paint, or a new gate on the parking garage.

You may hear some HOA terminology around “percent funded.” This is simply a ratio of how much money is in the fund vs. the projected reserve needs. When those two numbers match up, it would indicate the reserve is “fully funded.”

In best practice, 70-75% funded is ideal. The objective is to be able to replace reserve funding as the money goes out. HOA reserves funded at 70% or more are usually not in danger of having to levy special assessments.

How Much Money Needs to Be Held in Reserve?

Every community is unique, with different needs and plans. The amount of funding in the reserve will depend on many factors, including the age and condition of the property and its amenities, the size of the community, and its location.

Older communities may require more repairs. Similarly, if common areas are frequently used, they may be subject to more wear and tear. Newer buildings won’t need as much upkeep.

Also, communities in rural areas may have different needs from those in an urban setting. Common areas in rural communities may require less upkeep, but it would really depend on how the community is laid out, the climate, and the unique concerns of the area.

What Are Reserve Funds Used For?

HOA reserve funds are earmarked for the maintenance, replacement, and upkeep of existing infrastructure, such as repairing the parking garage, repaving the driveways, or resurfacing the tennis court.

The reserve funds can’t be used for establishing or purchasing anything new, like a swimming pool, a playground, or something that doesn’t already exist. Reserve funds are not used for ongoing maintenance, like landscaping or general upkeep.

According to the Davis Stirling Act, Civil Code 5510b, a board may not use reserve funds for anything other than restoration, repair, maintenance, or replacement of major components the association is obligated to restore, replace, maintain, etc., but may be allowed to borrow from the fund under certain circumstances. In such instances, such as when funds are needed to defend a legal matter, the borrowed amount must be replaced within one year, and a reasonable plan must be put in place as to how the money will be repaid.

While the Davis Stirling Act allows HOAs to borrow from reserves to stem short-term cash flow issues, doing so frequently is never a good idea. Depleting the fund will leave the community vulnerable in case of an actual emergency, but that’s just the tip of the proverbial iceberg.

Frequent borrowing may mask underlying budget issues and property mismanagement, resulting in frequent special assessments or an increase to the regular monthly assessment. Placing the burden of financial shortfalls on the resident is not just unfair to homeowners; it could also herald delays down the line when repairs or replacements are needed.

Instead of borrowing from reserves, HOAs should take a hard look at the budget, consider all other funding options, implement cost-saving strategies, and, if needed, issue a special assessment. Frequent assessments are generally a sign of trouble. If the only other option is to raise monthly dues, the association may face pushback from residents, who would be right to raise concerns about how their assets are managed.

Final Thoughts on HOA Reserve Funds

So, now you know the ins and outs of HOA reserve funds. Reserve and operating funds are essential to the community’s financial health, preserving the property’s beauty and value and ensuring its residents’ safety.

Belwood Properties is a women-owned and operated property management services company serving Los Angeles and Southern California. Connect with us today to learn more about HOAs, property management, and how we help.

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