Understanding HOA Reserve Funds: Best Practices for Long-Term Planning

Homeowners associations (HOAs) play a crucial role in maintaining homeowner’s property values. A big way they achieve this aim is to keep the shared community assets, from roads to recreational amenities, well-maintained. Reserve funds are crucial for the long-term maintenance plans of an HOA.

Minnesota has a statute that requires HOAs to “provide from year to year, on a cumulative basis, for adequate reserve funds to cover the replacement of those parts of the common interest community which the association is obligated to replace.” Essentially, HOA Boards are required to keep reserve funds on hand for planned maintenance and replacement of capital components.

But what are reserve funds exactly, and why are they important? In the rest of this guide, we will answer those questions. And, most importantly, tell you the best practices for long-term reserve fund planning.

What are HOA Reserve Funds?

First, let’s define reserve funds.

An HOA reserve fund is a savings account specifically set aside for major, infrequent repairs or replacements. Unlike the operating budget, which handles daily expenses, the reserve fund is used for larger, capital projects.

For example, the following expenses would be covered by reserve funds:

• Replacing roofs and siding on shared community buildings. 
• Resurfacing roads, pathways, and parking areas.
• Upgrading community amenities, such as pools, clubhouses, playgrounds, etc.
• Overhauling mechanical systems, such as HVAC units or elevators. 
• Addressing structural repairs.

Why are HOA Reserve Funds Important?

You may be familiar with reserve funds for apartment buildings and condominium complexes. However, this type of savings account is just as important for an HOA. Here are several reasons why:

1. It provides a financial safety net, allowing the HOA to handle large expenses without needing to push the cost onto homeowners. 
2. It helps maintain property values by providing well-kept shared areas that are attractive to potential homeowners. 
3. It helps your HOA avoid special assessments, a one-time fee charged to residents to cover unexpected expenses. 
4. It allows your HOA to comply with current laws and regulations, including Minnesota’s statute 515B.3-114.

Best Practices for Long-Term Reserve Fund Planning

So, now that you know what reserve funds are and why they are important, you are ready to learn how to plan for them. To ensure your HOA’s financial health and avoid crises, your HOA should follow these best practices for reserve fun planning.

1. Conduct regular reserve studies: Reserve studies are assessments that evaluate the state of your HOA’s physical assets, estimate their remaining life space, and project costs for repair or replacement. They should be conducted by a professional every 3-5 years and reviewed by the Board at least every third year.

2. Set realistic contribution levels: Reserve funds are funded by community members. Your Board should set annual contribution levels based on the results of your reserve study.

3. Invest reserve funds prudently: To make the most of their reserve fund, many community associations choose to invest. However, we recommend that you only invest your reserve funds in conservative options, such as money market accounts or CDs, which provide modest returns while ensuring the safety and liquidity of your HOA’s money.

4. Ask for help from a property management company that specializes in reserve fund planning: Experts in reserve fund planning are essential for helping your Board prepare for any long-term maintenance project. For example, at Omega Property Management, our team can guide your Board through the reserve study process, provide funding options and investments, and help ensure that your reserve fund remains aligned with your community’s needs and goals.

Contact Omega Property Management today to learn more!