Often, managers of Homeowners Associations (HOAs) are hesitant to conduct special assessments, as the money required to perform them may not be recovered, and the frequency of these payments can be unknown. That’s why it’s important to have reserve funds readily available to pay for these repairs and replacements. The question is, how does the HOA board know how much money it needs to set aside? Fortunately, HOA reserve studies can be used to determine how much money should be reserved to cover unforeseen repairs or replacements. If you are a member of an HOA, this blog will explain how often reserve studies should be conducted and what key takeaways can be learned from them.
Reserve studies should only be performed by certified professionals. Two national credentials are available for reserve study professionals: The Association of Professional Reserve Analysts (APRA) has the Professional Reserve Analyst (PRA) designation, and the Community Associations Institute (CAI) has the Reserve Specialist (RS) designation.
In California, nearly all associations, regardless of size, are required to have a reserve study (Civ. Code § 5550) if the total replacement costs are 50% or more of the gross budget of the association, excluding the association’s reserve account for that period. (Civ. Code § 5550(a).) It is suggested that reserve studies be performed in accordance with the changing economy; therefore, when inflation is high, repairs may cost more, making reserve studies more necessary.
HOAs in California are required to conduct a reserve study on-site at the property every three years, with an Annual Reserve Study Update in the following two years until the next site inspection. After an on-site reserve study is conducted, two more Annual Updates follow before the next on-site inspection.
Reserve Studies should follow National Reserve Study Standards. In California, they should also follow the State of California Reserve Study Guidelines. Studies should contain the following information:
- Common Area Components—The reserve study must identify and list major common area components that are the association’s responsibility.
- Expected Useful Life—Estimates of the expected useful life of these components need to be made.
- Estimated Costs—It needs to include estimates of repair and replacement costs associated with each component, factoring in inflation.
- Reserve Contributions—It must provide an estimate of the total annual contribution necessary.
- Funding Plan—The reserve study must contain a reserve funding plan. The plan could be strictly through monthly contributions or a combination of monthly contributions and special assessments.
To determine the general financial health of your HOA, look at the Percent Funded number of the reserves. This number is included in all reserve studies and is probably the most important figure in the entire report. The general guidelines are as follows:
- Well-Funded – 70% funded and above
- Fairly-Funded – 30% to 70% funded
- Poorly-Funded – 30% funded and below
While many boards try to run as close to 100% funded as possible, others keep their monthly assessments lower. Generally, when an HOA’s percent funded number is lower, there is a higher chance that future special assessments will take place.
HOAs should prioritize maintaining sufficient financial reserves, as being caught off guard could lead to poor assessment results. By using reserve studies, HOA members can help their community prepare for the future, staying on top of potential repairs and replacements and instilling confidence and trust in its membership.
