One of the most critical aspects of a well-run homeowners’ association (HOA) is establishing and maintaining financial stability. Because of this, it’s important for board members to be thoroughly educated on the ins and outs of association budgeting and finances, including reserve funds and reserve studies.

A reserve fund is an account that all HOAs should have. However, many HOAs don’t have a reserve fund, or if they do, it’s severely underfunded, which can be detrimental to the community. Read on to learn about HOA reserve funds, why your HOA needs one, and more.

What is an HOA reserve fund?

In short, a reserve fund is a special savings account for an HOA. Funded by a portion of resident dues, fees, fines, and interest from existing reserves, the money in an HOA reserve fund is used to pay for large-scale projects, significant unexpected expenses, and major repairs and replacements that don’t occur on a regular basis.

What does the HOA do with the reserve fund?

Most HOAs have strict laws, rules, and regulations about how and when reserve funds can be spent. Every HOA is unique, but reserve funds can typically only be used for things like:

• Major landscaping projects
• Major renovations and construction
• Roof and fencing repairs and replacements
• Pool and playground equipment and repairs
• Shared area and structure painting
• Road and sidewalk repairs and resurfacing
• Disaster response and recovery

Because reserve funds are so regulated, always consult your governing documents and/or association attorney before allocating them.

How are reserve funds different from operating funds?

Expenses that cannot be covered by HOA reserves are usually covered by the HOA’s operating funds. Reserve funds cover future, more costly expenses, whereas operating funds cover regular, day-to-day operational costs. It varies by association, but operating funds are often used to pay for things such as:

• Regular maintenance
• Insurance
• Landscaping
• Community management company expenses
• Utilities
• Accounting and legal fees
• Taxes
• Software
• Security

Why does my HOA need a reserve fund?

HOA residents trust the board to responsibly manage money and maintain the financial health of the association. As part of this, the board must confirm the community is prepared for expected—and unexpected—future financial obligations.

For example, with a sufficiently funded reserve account, a community can fix a broken pool pump or repair clubhouse damage from a storm without raising concerns, increasing dues, or asking homeowners for more money through a special assessment. When reserve funds are fully funded, it’s attractive to prospective buyers, gives residents peace of mind, and increases lender confidence. Plus, an adequately funded reserve account is actually required by law in many areas.

How to calculate HOA reserve fund amounts

There’s no one-size-fits-all approach to calculating appropriate HOA reserve funds. Every HOA has different needs based on the community type and complexity, location, amenities, and more. While everyone should aim to have fully funded reserves, it’s a good idea to keep reserves funded at least at the 70% level. If you have anything below that, you can expose your community to a harmful financial burden.

To find out how much money your HOA should have in a reserve fund, you’ll need to perform a reserve study. During a reserve study, a professional evaluates the association’s assets, budget, and revenue and uses that information to develop a long-term funding plan for reserves. Due to the complexity of reserves, you should have a Reserve Specialist® or reserve analyst certified by the Community Associations Institute (CAI) conduct a professional reserve study. When leading a reserve study, the professional will do things like:

• Take inventory of the association’s assets on-site.
• Assess the condition of assets.
• Predict future repairs, component lifespans, and current replacement costs.
• Calculate potential long-term expenses.
• Evaluate the status and strength of the existing reserve fund.  
• Decide resident contribution amounts.  
• And more.

The parameters and frequency of your HOA’s reserve study will be outlined in federal, state, or local laws and your association’s governing documents. For example, HOAs in California must conduct a reserve study every three years, while HOAs in Maryland only need one every five years. Board members must make it a priority to stay on top of reserve funds and reserve studies to ensure the community remains financially stable.

Are HOA reserve funds taxable?

Typically, HOA reserve funds aren’t taxed when:

• A reserve study has been carried out.
• The funds have been appropriately accounted for.
• They’re used in their designated fashion.

However, all HOAs should consult with their management company, lawyer, and tax professional to guarantee compliance with laws, rules, and regulations.

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As you can see, maintaining an adequate reserve fund is crucial to the success of your community. With TownSq, the all-in-one app for managed communities, financial management is easier than ever. Our user-friendly platform makes viewing statements, paying online, communicating updates, and more a breeze. Request a demo to learn more about TownSq and our cutting-edge financial management features.