RESERVES IN AN HOA – HOW MUCH IS NEEDED?

A question about reserves and what is required was sent to me via email today that is a very common one. And I have a solution to offer!

I live in a 7 unit building. My question is – how much reserves are required for an HOA like ours? How do we figure that out? Can you recommend where I can find information about guidelines an association such as ours should have with regard to the question? I’m searching high and low and do not seem to be having much luck.

Readers, you are in luck. There is a Primer on my website in the webstore that is all about what money should be put away for reserves in California. It sets forth what laws apply, what else comes into consideration (like “fiduciary duty”) and what to watch out for. It is the Reserves-1 Primer, $25. I do not know anywhere else that you can get this in depth information in one place. You can read the law, which does not require a dollar amount or percentage of what is needed. But the fact is that how much should be put away depends completely on the various maintenance obligations within the development (which is found in the governing documents). The amount would vary greatly depending on whether the association is a condo association or is instead buildings with townhomes, or the property consists of unattached dwellings.  They key consideration is to what extent the Association has to maintain the buildings and improvements on the property in the development. The Primer will explain alot about how to figure it out.
 
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2 Responses to RESERVES IN AN HOA – HOW MUCH IS NEEDED?
  1. Judy Tanka
    February 4, 2010 | 5:45 am

    Does California law limit how much investment income an HOA can generate?

    • Beth Grimm
      February 6, 2010 | 6:10 am

      The Davis Stirling Act does not have any stated limits on investments. Limits on income may be pertinent through the tax codes. A California homeowners association that is incorporated normally qualifies as a nonprofit corporation (in California most are nonprofit mutual benefit corporations) and the nonprofit status rests on the fact that the bulk of the assessments collected are for maintenance purposes. If the association has too much income over and above that needed for maintenance and administration, the nonprofit status of the HOA or Condo Association can be jeopardized. In other words, if the association becomes a “profitable” venture, it may lose its nonprofit status and the tax benefits that go along with that. I can’t see that interest on investments would normally rise to the level of being a threat to the nonprofit status, but since I do not know any more details, I have to stick to generalities. And since I’m not a tax lawyer, I am not going to quote percentages or requirements in the Tax Code.