An HOA can have a substantial amount of money in its reserve account while still facing an unexpected expense or a shortage in its operating budget. That can lead to an obvious question for board members: If the association already has the money, why can’t it use it?
The answer is that HOA reserve funds generally aren’t the same as money in a regular savings account. Reserves are typically set aside for major repairs, replacements, and other long-term expenses involving common property the association is responsible for maintaining.
So, can an HOA use reserve funds for anything? Generally, no. Whether reserve funds can be used for a particular expense depends on the purpose of the expenditure, the association’s governing documents, applicable state law, and how the reserve funds have been designated.
Before approving a withdrawal, board members should understand what the reserve funds are intended to cover and whether the proposed expense fits that purpose.
What are HOA reserve funds?
HOA reserve funds are money an association sets aside for major expenses that are expected in the future but don’t occur every year.
Instead of waiting until a roof, road, pool, or other community asset needs major work and asking homeowners to cover the entire cost at once, an HOA can collect money gradually through regular assessments and contribute a portion to reserves.
For example, suppose an HOA is responsible for private roads expected to need resurfacing every 15 years. Rather than waiting until the work is necessary and issuing a large special assessment, the association can contribute money to its reserves each year in preparation for the project.
Depending on the community, reserves may be established for private roads, parking areas, roofs, clubhouses, swimming pools, elevators, sidewalks, fences, gates, access systems, major mechanical equipment, exterior painting, stormwater infrastructure, and other common-area components.
Exactly what belongs in reserves varies by community. A large master-planned association with extensive amenities may have dozens of reserve components, while a smaller HOA with limited common property may have relatively few.
A reserve study can help identify these components, estimate their remaining useful lives and replacement costs, and determine how much the association should contribute to reserves over time.
Can an HOA use reserve funds for anything?
Generally, an HOA shouldn’t treat its reserve account as money available for any expense that comes up.
Reserve funds are typically intended for major repairs, replacements, restoration, and certain significant maintenance projects involving components the association is responsible for maintaining. State law, governing documents, and the association’s reserve plan may further restrict how that money can be spent.
One of the most important distinctions for board members is the difference between operating expenses and reserve expenses.
Operating expenses are the regular costs of running the association. Reserve expenses are generally larger, less frequent costs associated with maintaining, repairing, or replacing major community assets.
A large reserve balance can sometimes create the impression that an association has extra money available. In reality, much of that money may already be needed for projects expected five, 10, or even 20 years from now.
Using reserves for something else today could leave the association without enough money when those projects arrive.
What can HOA reserve funds be used for?
Reserve funds are commonly used for significant repairs and replacements involving major common-area components.
Suppose an HOA’s reserve study identifies its private roads as a reserve component and estimates that resurfacing will be necessary every 15 years. When the time comes to complete that work, reserve funds may be an appropriate funding source, subject to the association’s governing documents and applicable law.
Other common reserve expenditures may include replacing a clubhouse roof, resurfacing a swimming pool, replacing community fencing, repaving private roads or parking areas, replacing major mechanical equipment, replacing an aging gate or access system, completing major exterior painting, or replacing common-area recreational equipment.
The important question isn’t simply whether a project is expensive. An unusually expensive landscaping project, for example, doesn’t automatically become a reserve expense because of its price.
Instead, the board should determine whether the HOA is responsible for the component, whether the expense is consistent with the reserve plan, and whether reserve funds can be used for that purpose under the governing documents and applicable law.
What shouldn’t HOA reserve funds be used for?
Routine operating expenses generally belong in the HOA’s operating budget rather than its reserve fund.
These expenses may include landscaping contracts, management fees, utilities, insurance premiums, janitorial services, routine pest control, administrative costs, and other recurring expenses associated with running the community.
The distinction isn’t always straightforward because operating and reserve expenses can involve the same asset.
Consider a community swimming pool. Weekly cleaning, routine chemical treatment, and minor repairs would generally be operating expenses. Completely resurfacing the pool after years of use, however, may be a reserve expense if resurfacing is included in the association’s reserve plan.
The same principle can apply to a community gate. Paying a technician to repair a malfunctioning sensor may be an operating expense, while replacing the entire gate system at the end of its useful life may qualify as a reserve expense.
Boards should consider the nature and purpose of the work rather than assuming every expense involving a reserve component should come from reserves.
Can an HOA use reserve funds for operating expenses?
Boards should be particularly cautious about using reserves to cover ordinary operating expenses.
If an HOA routinely needs reserve money to pay for landscaping, utilities, management, insurance, or other recurring bills, the association may have an operating budget problem rather than a reserve-funding problem.
Suppose insurance premiums increase substantially and the operating budget no longer has enough money to cover them. Taking money from reserves might address the immediate shortage, but it doesn’t address the underlying mismatch between the association’s regular income and regular expenses.
In some jurisdictions and circumstances, an association may be permitted to borrow or transfer money from reserves. There may be requirements involving board action, homeowner notification, documentation, repayment, or specific deadlines.
The fact that money is available doesn’t necessarily mean the board has the authority to use it. Before transferring reserve funds to cover operating expenses, boards should review their governing documents and applicable state requirements.
Can an HOA use reserve funds for emergency repairs?
Potentially, but an emergency doesn’t necessarily give the board unrestricted access to reserves.
The first question should be what needs to be repaired.
If a severe storm damages an association-maintained roof that is already included in the reserve plan, reserves may be an appropriate funding source for some of the repair or replacement costs. Insurance coverage, deductibles, governing documents, and state requirements can also affect that decision.
The answer may be less straightforward when the emergency involves something that isn’t part of the reserve plan. Depending on the circumstances, an association may need to consider operating funds, insurance proceeds, reserves when permitted, a special assessment, financing, or a combination of funding sources.
Boards should also consider what a large emergency withdrawal would do to other projects. Even if the HOA is permitted to use reserves, doing so could create a future funding gap that needs to be addressed through increased reserve contributions or another funding strategy.
Calling an expense an “emergency” doesn’t automatically change the rules governing reserve funds.
Can an HOA use reserves for something that isn’t in the reserve study?
Possibly. A project not appearing in the current reserve study doesn’t necessarily mean reserve funds can never be used for it.
Reserve studies are planning tools, and communities change. A component may have been unintentionally omitted from an older study. The association may have acquired additional common property. An asset may fail earlier than expected. The HOA’s maintenance responsibilities may also change.
If a significant project isn’t included in the reserve study, the board should determine why before authorizing the expenditure.
Board members should consider whether the HOA is responsible for the component, whether the governing documents address it, whether state law restricts the use of reserves, and whether the component should be added to the reserve study.
They should also consider how the unplanned expenditure would affect funding for projects already included in the reserve schedule.
A project missing from the reserve study isn’t automatically an inappropriate reserve expense. It does, however, deserve additional review.
Can HOA reserves pay for new improvements?
Boards should distinguish between replacing an existing community asset and adding something entirely new.
Suppose an HOA has a playground that is approaching the end of its useful life. If playground replacement is included in the reserve plan, replacing the existing equipment may qualify as a reserve expenditure.
Now suppose the community has never had a playground and the board wants to build one. That is a different type of project.
Reserve study standards generally distinguish capital improvements from reserve projects. A capital improvement adds something to the common area that didn’t previously exist. Once constructed, the new asset may become part of future reserve planning because it will eventually require repair or replacement.
Boards considering a new amenity or significant improvement should review their governing documents and applicable state requirements to determine how the project can be authorized and funded rather than assuming the reserve account is available.
What happens if an HOA uses reserve funds improperly?
Using reserve funds for the wrong purpose can create financial problems even before considering potential legal consequences.
Suppose an association has accumulated $300,000 toward future road resurfacing but uses $75,000 to cover an operating budget shortfall.
The roads will still need to be resurfaced. The association simply has $75,000 less available when that project arrives.
The board may eventually have to increase assessments, impose a special assessment, borrow money, delay necessary work, or find another funding source.
There may also be legal or governance consequences if reserve funds are spent in violation of state law or the association’s governing documents.
Even when an expenditure is permitted, repeatedly using reserves to cover operating shortfalls can be a warning sign that regular assessments aren’t keeping pace with the actual cost of running the community.
For that reason, boards should ask two separate questions before approving a withdrawal: Are we allowed to use the money this way? And what happens to our long-term financial plan if we do?
How does a reserve study help the board?
A reserve study gives the board a roadmap for the association’s long-term capital needs.
It typically evaluates major components the association is responsible for maintaining and considers factors such as their condition, estimated remaining useful life, anticipated repair or replacement cost, and the funding needed to prepare for those expenses.
That information provides important context for the HOA’s reserve balance.
An association might have $500,000 in reserves, which can look like a substantial amount of available money. But if its reserve study identifies $700,000 in roof, road, pool, and other projects over the next several years, that $500,000 isn’t necessarily surplus cash.
This is why the bank balance alone doesn’t tell board members whether the HOA has “extra” reserve money.
What should the board check before using reserve funds?
Before approving a reserve expenditure, board members should be able to answer several basic questions.
First, what exactly is the money being spent on? Identify the component and scope of work rather than approving a general transfer from reserves.
Second, is the HOA responsible for it? Review the governing documents to confirm that maintenance, repair, or replacement of the component is an association responsibility.
Third, is it included in the reserve plan? If it isn’t, determine why and whether the reserve study should be updated.
Fourth, is the expenditure permitted? Review applicable state law and the governing documents for restrictions, procedures, or homeowner approval requirements.
Fifth, how will the withdrawal affect future projects? A permitted expenditure can still create problems if it leaves the association unable to fund another major project.
Finally, has the decision been documented? Board minutes and financial records should clearly identify what the money was used for and why the board approved the expenditure.
If the board can’t confidently answer these questions, it may be appropriate to get guidance from the association’s attorney, CPA, reserve specialist, or community association manager before moving the money.
Frequently asked questions about HOA reserve funds
Can an HOA use reserve funds to pay regular bills?
Generally, reserve funds are intended for major repair and replacement expenses rather than recurring operating bills such as utilities, landscaping, insurance, and management fees. Rules governing transfers or borrowing from reserves vary by state and association.
Can HOA reserve funds be used for maintenance?
It depends on the type of maintenance. Routine recurring maintenance is typically an operating expense, while certain major or deferred maintenance projects may qualify as reserve expenses. Boards should check the reserve study, governing documents, and applicable state law.
Can an HOA borrow money from its reserve fund?
Some associations may be permitted to temporarily borrow or transfer money from reserves. However, the association may have to follow specific notice, approval, documentation, or repayment requirements.
Can an HOA use reserves for an emergency?
Potentially. If the emergency involves a component included in the reserve plan, reserve funds may be an appropriate funding source. Other emergency expenses may be subject to additional restrictions. An emergency doesn’t automatically give the board unrestricted access to reserves.
What happens if an HOA doesn’t have enough reserve funds?
An HOA without sufficient reserves may need to increase regular assessments, impose a special assessment, borrow money, delay projects, or use another permitted funding source when major repairs become necessary.
The bottom line for HOA boards
HOA reserve funds aren’t a general-purpose savings account.
They are intended to prepare the association for major repairs, replacements, and other long-term expenses involving community assets the HOA is responsible for maintaining. Whether a particular expense qualifies depends on the nature of the project, the association’s governing documents and reserve plan, and applicable state law.
Before approving a withdrawal, board members should understand what the money was collected for, confirm that the expenditure is permitted, and consider how using those funds will affect future projects.
Most importantly, a large reserve balance shouldn’t automatically be viewed as excess cash. Roads eventually need resurfacing. Roofs need replacing. Pools, gates, mechanical equipment, and other community assets reach the end of their useful lives.
In many cases, the money sitting in the reserve account already has a job. Protecting those funds for their intended purpose can put the association in a better position when major expenses arrive and reduce the likelihood that homeowners will face a large, unexpected financial burden.
This article provides general educational information and isn’t legal, accounting, or financial advice. HOA laws and governing documents vary. Boards should consult qualified professionals regarding requirements that apply to their association.
