HOA Reserves 101
Reserves are savings for major common-area repairs and replacements. They are not the same thing as the operating budget.
What reserves are for
Reserve funds are generally used for major components the association is responsible to repair, replace, restore, or maintain, such as building exterior items, roofs, asphalt, fences, pool components, or other long-lived common-area assets.
What a reserve study does
A reserve study identifies major components, estimates useful life and replacement cost, and estimates the annual contribution needed to fund future work.
Reserves should move
Reserve balances are expected to go down when major reserve projects are paid for, then rebuild over time through the reserve funding plan.
Reserve balance vs. percent funded
A fixed dollar amount in the bank does not tell the whole story. Percent funded compares reserve assets to the reserve study’s estimate of what should be accumulated for future component needs.
Dollar balance
Shows how much cash or cash-equivalent reserve money exists at a point in time.
Helpful, but not enough by itself.
Percent funded
Shows how reserve cash compares to the reserve study’s calculated reserve need.
Often more useful for comparing reserve health over time.
California reserve-study basics
General rule
California Civil Code §5550 requires an HOA board to cause a reasonably competent and diligent visual reserve study at least once every three years when the statutory threshold applies, and the board must review the study annually and consider necessary adjustments.
See official source: California Civil Code §5550.
Common owner questions
Reserve targets and benchmarks are not always the same thing as legal requirements. Owners should ask what source supports any claimed requirement and whether the number is a legal mandate, lender guideline, reserve-study target, or board policy goal.
Not necessarily. Reserves exist so major planned expenses can be paid when due. The key question is what the reserve level and percent funded are projected to be after the project, and how the reserve funding plan rebuilds them over time.
Ask for the current reserve study, reserve funding plan, projected reserve balance after major projects, and the association’s official reserve summary.