Scott Ford
President, California Builder Services
Beginning January 1, 2032, AB 2050 will change how California homeowners associations plan and fund their reserves.
The new law will require an HOA’s reserve study to identify the minimum annual contribution needed to prevent the reserve balance from falling below zero during the following 30 years. If the projection does fall below zero, additional funding requirements may apply, including a transfer of at least 15% of the association’s gross annual budget into reserves.
At the same time, the new reserve funding special assessment created by the law generally cannot be used more than once every nine years.
That combination is where we see the real challenge.
A reserve study can estimate what an association needs based on the information available today. It can’t guarantee that a roof will last as long as expected, construction costs won’t jump, insurance won’t increase dramatically, or homeowners will approve an assessment when additional money is needed.
That is why complying with the minimum requirements of AB 2050 and maintaining a financially healthy reserve program are not necessarily the same thing.
When does AB 2050 take effect?
AB 2050 was approved, signed and filed on September 29, 2026.
The new reserve funding provisions become operative January 1, 2032.
Associations do not need to begin complying with these new funding provisions immediately, but boards, managers and reserve study professionals should understand the changes now because long-term reserve planning extends well beyond 2032.
What does AB 2050 require California HOAs to do?
Under the new law, the reserve study will need to identify the minimum annual contribution necessary to prevent the association’s projected reserve balance from falling below zero at any point during the following 30 years.
The association will then be required to fund at least that amount.
If the reserve projection falls below zero at any point during that 30-year period, the association must also transfer at least 15% of its gross annual budget into reserves each year until the projection no longer falls below zero.
That does not mean every HOA is simply required to fund reserves at 15%.
It also does not mean 15% will necessarily be enough.
Depending on the association’s current reserve balance, future expenses, component lives and replacement costs, the reserve study could require a substantially larger contribution.
Does AB 2050 require an HOA to be 15% funded?
No.
This is an important distinction.
The 15% requirement is a transfer based on the association’s gross annual budget when the reserve projection shows a future negative balance.
It is not the same thing as saying the association must be “15% funded.”
Percent funded is a separate measurement comparing the association’s actual reserve balance with its calculated fully funded balance.
Those are two different concepts.
How does the 15% reserve requirement relate to California’s 20% assessment limit?
They are also two different measurements.
California’s existing assessment rules generally require homeowner approval when regular assessments increase more than 20% over the preceding fiscal year or when special assessments exceed an aggregate 5% of that year’s budgeted gross expenses, subject to the requirements and exceptions contained in the Civil Code.
The 15% reserve provision under AB 2050 does not create an additional 15% of assessment authority.
You cannot subtract 15% from 20% and say the association only has 5% left for operations.
You also cannot add them together and conclude that the board has 35% of assessment authority.
But there is a very real practical problem: reserves and operating expenses are competing for the same homeowner dollars.
If an HOA needs a significant increase in reserve contributions at the same time insurance, utilities, labor or other operating expenses are increasing, the board has to deal with both.
Putting more money into reserves does not pay the insurance bill.
That is why we believe the operating budget and reserve funding plan need to be prepared together, not as two completely separate exercises.
What happens if the HOA cannot fund the required amount through its annual budget?
Under the conditions in Section 5552(c)(1), the association must levy a reserve funding special assessment subject to Section 5605.
If the special-assessment cap prevents sufficient funding, the association must have the membership vote on the amount above the cap needed to fund the minimum level.
That creates an obvious practical issue.
Requiring a homeowner vote does not guarantee that the assessment will pass.
And even if it passes, approving an assessment and actually collecting the money are two different things.
A reserve funding plan that depends heavily on future special assessments needs to consider homeowner affordability, voting requirements, collection timing and the possibility that the assessment may not be approved.
Can an HOA levy a reserve funding special assessment every year?
No.
AB 2050 generally prevents an association from levying this particular reserve funding special assessment more than once every nine years.
That does not mean every type of special assessment is prohibited for nine years.
The restriction applies to the reserve funding special assessment created by the new law.
Still, nine years is a long time in the life of a building.
A roof expected to last another 12 years might fail after seven.
An HVAC system may reach the end of its useful life earlier than expected.
A replacement project estimated at $500,000 today might cost $700,000 several years from now.
A funding plan can be completely reasonable when it is prepared and still become inadequate when conditions change.
Why is the nine-year rule a concern?
Because buildings and costs do not always behave according to a 30-year spreadsheet.
We saw that clearly during and after the COVID era. Labor, materials, supply-chain issues and inflation caused some construction costs to increase dramatically in a relatively short period of time.
California insurance has created another major pressure for many associations. Some communities have experienced substantial premium increases or difficulty obtaining coverage at all.
Insurance is generally an operating expense rather than a reserve component, but homeowners are still paying both bills.
The association does not get one pool of homeowners for reserves and another pool for operations.
Everything ultimately comes from the same owners.
That is why maintaining some financial margin matters.
What percent funded should an HOA be?
AB 2050 does not require an association to maintain a particular percent-funded level such as 50% or 70%.
Those are reserve-planning benchmarks, not statutory requirements.
From a practical reserve-study standpoint, however, we generally recommend that associations remain above 50% funded.
We also generally recommend increasing reserve contributions each year by at least the rate of inflation unless the association’s specific reserve analysis supports a different approach.
Why?
Because holding reserve contributions flat while replacement costs continue increasing can create the appearance of affordability today while quietly creating a larger funding problem later.
If construction costs increase 4% and the association’s reserve contribution remains flat, the association is losing purchasing power every year.
Over a long enough period, that matters.
Why is 70% funded or better a stronger position?
Associations that can remain around 70% funded or higher generally have significantly more financial flexibility.
The additional reserve balance creates a cushion when reality does not match the assumptions in the reserve study.
For example:
- A roof might fail five years earlier than expected.
- An elevator, HVAC system or other major piece of equipment may not reach its projected useful life.
- Several large projects may come due at the same time.
- Construction inflation may substantially exceed normal inflation for several years.
- Insurance or other operating expenses may put unexpected pressure on the association’s overall budget.
A better-funded association has more ability to absorb those events without immediately creating a reserve cash-flow shortage or requiring a large special assessment.
That does not mean an association that is 70% funded is guaranteed never to have a funding problem.
There is no percentage that provides that guarantee.
But over a 30-year projection, maintaining a stronger reserve position gives the association considerably more room to absorb shortened useful lives, cost overruns, unusual inflation and overlapping projects while maintaining positive reserve cash flow.
That is why we believe boards should look beyond the minimum contribution necessary to keep the projection barely above zero.
The goal should not be to make the spreadsheet work by the narrowest possible margin.
The goal should be to build a funding plan that can survive when something does not go according to plan.
Why does annual inflation matter in a reserve study?
Reserve expenses are long-term construction and replacement costs.
Those costs generally increase over time.
If reserve contributions do not increase along with the cost of the work, the association can gradually fall behind even when the current budget appears balanced.
For example, an association may have a roof replacement projected 15 years from now.
If the estimated cost of that roof increases every year but reserve contributions remain unchanged, the funding gap grows.
That does not necessarily create a problem immediately.
It creates a problem later, when the association actually needs the money.
Annual reserve increases that at least keep pace with inflation help preserve the purchasing power of the association’s contributions.
The reserve study should still evaluate the actual components, remaining useful lives, replacement costs and funding requirements each year rather than simply applying one inflation percentage to everything.
What happens when a component fails earlier than expected?
This is one of the reasons we strongly recommend updating reserve studies regularly.
Useful life is an estimate.
A roof expected to last 25 years may last 30.
It may also last 18.
Mechanical equipment can fail early. Pavement can deteriorate faster than expected. Water intrusion can expose damage that was not visible during the prior inspection.
For certain condominium associations, California’s exterior elevated element inspection requirements can also identify repairs that were not previously included in the reserve projection.
When new information becomes available, the reserve study needs to change with it.
The spreadsheet should follow the building.
The building should not be forced to follow the spreadsheet.
Can an HOA rely on emergency assessments if something goes wrong?
California law provides emergency assessment authority for certain qualifying situations, including some unexpected health and safety conditions and unforeseeable repair or maintenance expenses.
But associations should be careful about treating that as a funding strategy.
Higher inflation does not automatically create an emergency.
A large insurance increase does not automatically create an emergency.
And the interaction between existing emergency assessment authority and AB 2050’s new nine-year reserve funding restriction should be reviewed by association legal counsel based on the specific facts.
Emergency authority should be treated as an exception, not the long-term reserve plan.
How should an HOA test its reserve funding plan?
We recommend testing the plan against situations that are worse than the base assumptions.
Ask:
- What happens if replacement costs are 10% or 20% higher than projected?
- What happens if a major component fails five years early?
- What happens if several large projects overlap?
- What happens if inflation remains unusually high for several years?
- What happens if the association experiences a major increase in insurance or another operating expense?
- What happens if homeowners reject a future assessment increase?
Those questions tell you much more about the strength of the funding plan than simply asking whether the ending balance stays one dollar above zero.
Is percent funded the same as cash flow?
No.
A low current reserve balance, a low percent-funded calculation and a projected negative reserve balance are three different findings.
An association can have a relatively low percent-funded calculation and still maintain positive cash flow for the foreseeable future.
Another association could appear reasonably funded today but have several large projects coming due that create a future cash-flow problem.
Boards need to understand which problem they actually have.
Percent funded is an important indicator, but it should be evaluated together with the association’s 30-year cash-flow projection, component schedule, current reserve balance and annual contribution requirements.
Should HOAs try to avoid special assessments completely?
Not necessarily.
Different communities may make different funding decisions.
Some homeowners prefer higher regular assessments and greater reserve stability.
Other communities may prefer lower ongoing assessments while accepting the possibility of future special assessments.
We believe informed homeowners should retain meaningful flexibility in making those decisions.
But a special-assessment-oriented funding plan needs to be realistic.
A future vote is not cash.
The association has to consider whether owners can afford the assessment, whether they will approve it, how quickly it can be collected and whether the money will be available before the project has to begin.
Do stronger reserves help protect property values?
Maintaining the association’s physical assets and having adequate reserves can support the long-term financial health of the community.
Research has also found an average sale-price premium for single-family homes within HOAs, although results vary considerably by location and that research does not prove that every HOA increases property values.
At the same time, ownership costs matter.
Increasing assessments, insurance costs and other financial obligations can affect affordability and buyer appeal.
Those two issues have to be balanced.
An association cannot protect property values by ignoring necessary maintenance.
But it also should not assume there is no consequence to continually increasing the cost of ownership.
How do lender reserve requirements fit into this?
Lenders have their own condominium project-review requirements that are separate from AB 2050.
For applicable Fannie Mae condominium Full Reviews, the reserve allocation requirement increases from 10% to 15% of annual budgeted assessment income for loan applications dated on or after January 4, 2027.
Fannie Mae also has requirements governing when a qualifying reserve study can be used as an alternative.
Those are lending requirements.
They are not AB 2050 requirements, and they are not the same as the new 15% gross-budget reserve provision that becomes operative in 2032.
An HOA can potentially satisfy one standard and still have a problem under another.
Boards and managers should confirm the applicable lending requirements when financing eligibility is a concern.
Don’t solve the funding problem by changing the assumptions
Sometimes an accurate reserve study produces a number nobody likes.
That can create pressure on the manager, board or reserve analyst to find a way to lower the contribution.
There are legitimate ways to evaluate different funding strategies.
But changing an assumption simply because the answer is uncomfortable does not change the building.
Stretching a roof’s remaining useful life does not make the roof last longer.
Lowering its estimated replacement cost does not make the contractor’s future invoice smaller.
If the numbers support a future cash-flow shortfall, the reserve study should show it.
Then the board, manager and reserve professional can work together on how to address it.
How California Builder Services approaches reserve funding
At California Builder Services, we report negative projections when the assumptions support them.
But that is the beginning of the conversation, not the end.
We work collaboratively with boards and managers to understand what is driving the funding requirement and evaluate different approaches.
That may include reviewing component timing, current costs, useful lives, planned renovations, contribution levels, funding alternatives and the interaction between the reserve study and operating budget.
We also generally do not bill hourly for those conversations because we do not want a board or manager avoiding an important discussion because they are concerned about another invoice.
We see ourselves as a long-term partner, not simply the company preparing the next report.
AB 2050 makes that kind of planning even more important.
Use realistic costs.
Increase funding as costs increase.
Maintain a healthy reserve balance when possible.
Test what happens when components fail early or costs rise faster than expected.
And do not build a 30-year plan that only works if everything goes right.
Frequently Asked Questions About AB 2050 and HOA Reserve Funding
When does AB 2050 take effect?
The new reserve funding provisions become operative January 1, 2032.
Does AB 2050 require every HOA to contribute 15% to reserves?
No. The 15% gross-budget transfer applies when the association’s reserve projection falls below zero during the 30-year projection period.
Does AB 2050 require an HOA to be 50% funded?
No. Fifty percent funded is not a statutory requirement under AB 2050.
As a practical reserve-planning benchmark, California Builder Services generally recommends that associations remain above 50% funded when reasonably possible.
Is 70% funded better than 50% funded?
Generally, yes.
Maintaining a reserve position around 70% funded or higher provides a larger cushion against early component failures, unusual inflation, overlapping projects and other unexpected costs.
It is not a guarantee against future funding problems, but it provides more financial flexibility.
Should reserve contributions increase every year?
As a general planning practice, we recommend that reserve contributions increase at least enough to keep pace with inflation unless the association’s specific reserve analysis supports another approach.
Holding contributions flat while replacement costs continue increasing can gradually create a future funding gap.
Does the nine-year rule prohibit all HOA special assessments?
No.
The restriction applies to the specific reserve funding special assessment created under AB 2050. It does not categorically prohibit every type of special assessment during that nine-year period.
Can an HOA rely on a future homeowner vote to solve a reserve shortfall?
A future assessment may be part of a funding strategy, but boards should not assume the vote will automatically pass or that all of the money will be collected when needed.
Is percent funded the same thing as having enough cash?
No.
Percent funded is one measurement of reserve health. The association also needs to evaluate its actual reserve balance, annual contributions, component schedule and 30-year cash-flow projection.
What is the best reserve funding strategy?
There is no single funding level that works for every association.
The strongest plans generally use realistic replacement costs and useful lives, increase contributions as costs rise, maintain a meaningful reserve cushion and remain financially workable even when some assumptions turn out to be wrong.
Final Thoughts
AB 2050 creates a minimum funding framework.
A financially healthy association should be thinking beyond the minimum.
A 30-year reserve plan should have enough margin to handle the things we already know will happen at some point: costs will change, equipment will fail early, projects will overlap and operating expenses will put pressure on the budget.
The question should not simply be:
What is the minimum amount we can contribute and still comply?
A better question is:
What level of funding gives this association the best chance of handling the next 30 years without a financial crisis every time something goes wrong?
That is the conversation boards should be having now.
Contact California Builder Services if you would like to discuss your association’s reserve study, funding assumptions or how AB 2050 may affect your long-term planning.
This article is general information and professional opinion and is not legal advice.
Official References
- AB 2050, Chapter 796, Sections 1–5; future Civil Code Sections 5550(b)(6)–(7) and 5552, operative January 1, 2032
- California Civil Code Section 5605 — assessment limits, prerequisites and member approval
- California Civil Code Section 5610 — qualifying emergency exceptions
- California Civil Code Section 5550 — reserve study requirements
- California Civil Code Section 5551 — exterior elevated element inspections
- California Civil Code Section 5560 — reserve funding plans
- California Civil Code Section 5600 — assessment obligations
- California Civil Code Section 5300 — annual budget reports
- California Civil Code Section 5570 — reserve funding disclosures
- California Civil Code Section 4525 — transfer disclosures
- Federal Reserve, FOMC Statement, March 16, 2022
- California Department of Insurance, July 24, 2025
- Fannie Mae Selling Guide B4-2.2-01, Full Review Process
- Fannie Mae Lender Letter LL-2026-03
- Wyatt Clarke and Matthew Freedman, The Rise and Effects of Homeowners Associations
