Overview
Every HOA in California must prepare a reserve study every three years and disclose a written summary of reserve funding every year. These requirements exist to ensure long-term maintenance and repairs of the HOA’s major components are planned and funded, and to protect homeowners from massive future special assessments. The key figure in these disclosures is the “percent funded” number, which shows how well the HOA is positioned to meet future obligations.
For a deeper analysis, see my article: “HOA Reserve Studies in California: How Boards Manipulate the ‘Percent Funded’ Number.”
Updated September 15, 2025 to add FAQs on reserve study manipulation.
Key Points
Here are the basic requirements and principles every California homeowner should know about HOA reserve studies:
- Legal Requirements for Reserve Studies. HOAs are legally required under the Davis-Stirling Act to conduct a reserve study every three years and to provide an annual Assessment and Reserve Funding Disclosure Summary. The latter (i.e., the annual disclosure) must include the “percent funded number.”
- Annual Disclosures. Each year, the Assessment and Reserve Funding Disclosure Summary must include, among other things, the “percent funded” number, the reserve balance, whether repairs will be deferred, and whether loans or special assessments are expected.
- Why Reserve Studies Matter. Reserve studies determine how major repairs and replacements will be funded (and, therefore, indirectly, whether special assessments will be necessary in the future). Boards that fail to plan expose homeowners to sudden, steep financial demands.
- What a Reserve Study Includes. A reserve study is an inventory of an HOA’s major components, including, for each such component, the estimated useful life, remaining life, cost of repair or replacement if done today, and a funding plan showing how the HOA will meet those future costs.
- Percent Funded Figure. The “percent funded” figure isn’t just a technical calculation. It’s one of the fastest ways to assess whether your board is performing one of its most fundamental duties. A healthy reserve “percent funded” figure reflects long-term planning and fiscal responsibility. A weak one suggests poor oversight, deferred maintenance, and quite often a looming special assessment.
- Healthy vs. Risk Levels. A percent funded figure of 70% or higher is good to excellent; 65% is pretty good; 60% is fair; and below 60% is a red flag and often means a looming special assessment. Below 50% is, in my opinion, extremely concerning, and almost always means that a special assessment is on the horizon.
- Proper Adjustments to Percent Funded Figure by Qualified Professionals. Competent reserve specialists routinely update component timelines, useful life estimates, and replacement cost projections as part of their ongoing work. These adjustments are based on updated physical inspections, market conditions, inflation, and material performance data. For example, if the original study assumed that the area receives an average of six inches of rain per year, and the past year saw less than one inch, those unseasonably dry conditions might lead to reduced wood rot in certain major wood components. In that case, a reserve specialist might lengthen the component’s useful life based on observed reduction in the expected deterioration. That’s not manipulation. It’s responsible, evidence-based planning.
- Improper Board Influence and Fraudulent Adjustments of Percent Funded Figure. While competent professionals rely on physical inspections and data to make adjustments, bad HOA boards, and sometimes the reserve preparers they pressure, take a different approach. Their goal isn’t to plan responsibly. It’s to make the HOA’s finances appear better than they really are in the present, even if it means putting the community at risk at some vague future date.
- Permitted Use of Reserve Funds. Civil Code 5510 limits reserve funds to repairing or replacing the major components identified in the most recent reserve study, as well as to litigation involving those components.
- Improper Use of Reserve Funds. Civil Code 5510 limits reserve funds to repairing or replacing major components and litigation related to those components. Using reserves for operating expenses, bonuses, or unrelated costs is illegal.
- Borrowing From Reserve Funds. Civil Code 5515 allows temporary borrowing only if the board discloses the reason, repayment plan, and records the decision in open meeting minutes. Repayment must occur within one year unless a longer plan is documented.
- Red Flags for Homeowners. Missing components in the study, unrealistic cost estimates, inconsistent lifespans for identical components, sudden reserve balance drops, vague or missing minutes, or claims that predictable expenses were “unforeseen.”
Reserve studies are one of the clearest indicators of your HOA’s financial health. The “percent funded” figure, when calculated honestly, tells you whether your HOA is responsibly planning for long-term repairs or setting you up for financial crisis. Homeowners should review annual reserve disclosures carefully and watch for manipulation, misuse of funds, or signs of fraud.
FAQs
What is an HOA reserve study in California?
An HOA reserve study is a long-term financial plan that inventories major components, estimates their remaining useful life and replacement cost, and shows how the HOA will fund future repairs and replacements.
How often must an HOA prepare a reserve study in California?
Under the Davis-Stirling Act, HOAs must prepare a full reserve study every three years (Civil Code 5550) and provide an updated written reserve disclosure summary to homeowners every year (Civil Code 5300).
What does “percent funded” mean in an HOA reserve study?
The “percent funded” number shows how much money the HOA has set aside in reserves compared to what it should have based on component age and replacement costs. The higher the percent funded figure is, the better financially prepared your HOA is to handle future repairs and replacements.
What percent funded level is considered healthy for an HOA?
A percent funded figure of 75% or higher is considered very good to excellent. A figure of 70%-74% is considered good to very good. A figure of 65%-69% is considered okay. A figure of 60%-64% is considered fair. A figure of between 55%-59% is considered worrisome, but not an emergency yet. When you get into sub-50% numbers, that’s a major red flag, often indicates that a special assessment is likely at some point.
Can an HOA board manipulate the percent funded figure in a reserve study?
Yes, some boards improperly pressure reserve preparers to change assumptions, delete component line items, or wrongfully alter remaining lives, all to manipulate that figure and make the HOA’s finances look stronger than they really are. This can hide real risks from homeowners and lead to sudden special assessments later.
What is the legal use of HOA reserve funds?
Civil Code 5510 limits reserve funds to repairing or replacing major components identified in the reserve study and to litigation involving those components. Using reserve funds for operating expenses or bonuses is unlawful.
Can an HOA borrow from its reserve funds?
Yes, but only temporarily under Civil Code 5515. The board must disclose the reason, adopt a repayment plan, record the decision in open meeting minutes, and generally repay within one year unless a longer repayment plan is properly documented.
What red flags should homeowners watch for in reserve studies?
Warning signs include missing components, unrealistic cost estimates, inconsistent lifespans for similar items, sudden reserve balance drops, vague or missing board minutes, or claims that predictable expenses were “unforeseen.”
About MBK Chapman Fact Sheets
Homeowners searching for answers online will often come across articles that appear authoritative, but are actually written as search-engine marketing content rather than by an experienced HOA lawyer. These pieces tend to prioritize keyword density over clarity, accuracy, or legal context, which often leaves homeowners more confused than informed.
At MBK Chapman, our Fact Sheets are part of our HOA Law Library and are written by Michael Kushner, an HOA lawyer with decades of hands-on experience representing California homeowners. In fact, Michael Kushner is the HOA lawyer who pioneered the systems and strategies used by some of California’s most successful homeowner-side HOA law firms.
Each Fact Sheet is deliberately concise, statute-based, and designed as a quick-reference guide to help homeowners understand key HOA laws and enforcement rules at a glance.
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