Best Practices for Managing HOA Reserve Funds

Maintaining financial reserves is one of the most important responsibilities of a community association, but many remain seriously underfunded. While they may have no trouble paying everyday operating expenses, should something unexpected occur, those with insufficient cash reserves may be forced to impose a special assessment.

Helping homeowners associations, or HOAs, build financial resilience is an opportunity for your community association management company to provide added value. By adopting a more strategic approach to managing HOA reserve funds, community associations can make smarter decisions and improve financial resilience.

Conduct a reserve study

A detailed reserve study—conducted by a qualified consultant—is the best way to determine how much an HOA needs in its reserve fund.

"Every community association has unique needs, and that's going to be based on the reserve plan or reserve study," says Steve Esposito, Director of Reserve Management for Community Association Banking at First Citizens.

What is an HOA reserve study?

A reserve study will assess long-term capital needs to ensure that adequate funds are being set aside for future maintenance, repairs and replacements.

"The plan will allocate the reserve funds by tying them to the anticipated lifespan of the specific property and its amenities," Esposito explains.

The reserve study is not a one-and-done project, however—it should be updated regularly to account for changing conditions such as inflation or disaster recovery. In 2023, the Community Associations Institute, or CAI, updated its reserve study standards. These revised guidelines recommend that HOAs perform a site-based inspection at least every 3 years.

Set a reserve fund goal

A thorough review of property that could break or wear out can help an association establish its HOA reserve requirements. The CAI standards define the fully funded balance, or FFB, of an asset as the current replacement cost multiplied by its effective age and divided by its useful life.

Let's say an HOA's current reserves are $100,000, but the total FFB for all its property is $125,000. That means the current reserves represent 80% of full funding for anticipated expenses. The typical HOA reserves rule of thumb is to aim for 100% funding, and some jurisdictions and lenders may require a minimum level of funding.

Separate HOA reserve funds

Once an association has conducted a reserve study and has determined its long-term funding needs, it should separate these funds from those needed for immediate, short-term operating expenses—such as insurance premiums and ongoing maintenance costs. Many HOAs choose to use money market accounts for this purpose. These funds gain interest steadily while remaining accessible.

For future expenses, HOAs may consider investing in multiple certificates of deposit, or CDs, set to mature at varying intervals. Customizing the amounts and terms for these CDs can provide rolling access to needed funds.

Prioritize security for HOA banking

When searching out options for where to keep HOA funds, security should be a top priority. HOAs should consider accounts offering Federal Deposit Insurance Corporation, or FDIC, protection. In fact, many states require reserve funds to be within the FDIC production limits.

"Even if it's not required, it's definitely a best practice," says Esposito.

HOAs with larger reserve needs—for example, those responsible for maintaining pools, elaborate clubhouses or golf courses—may want to consider banking strategies that maximize FDIC coverage beyond the standard $250,000 limit per account holder at a single institution.

One way to do this is to open deposit accounts at banks with expertise in community association deposits. One option includes using services through the IntraFi^® Cash Service^SM network, or ICS^®. Your deposits can be distributed among multiple participating banks—ensuring that all balances remain below the limit for FDIC coverage—while still enabling you to deal with only one institution. The IntraFi Certificate of Deposit Account Registry Service^®, or CDARS^®, provides similar coverage for investments in CDs.

Keep liquidity and return in mind

Security is important for HOA reserve funds, but so is liquidity.

"There are really three parts to this pyramid," explains Esposito. "The first and most important is coverage or protection of a homeowners association's funds. The second tier is liquidity with the flexibility to access the funds in the event of an unplanned expense, such as damage from a natural disaster or equipment failure."

The third and final part of the pyramid is return or interest that can be earned on reserve funds, and this is where having the right financial partner can help keep HOAs on track to meet their capital spending goals.

"It's important to earn interest, but not at the expense of liquidity or protection," says Esposito.

Institutions with experience in community association banking will often meet with board members to explain what their options are for safely growing reserve funds. These options may shift due to changes in interest rates, so building a long-term relationship is key.

Aim for transparent reporting

Building a strong relationship with your association clients requires transparency around HOA finances. While no one likes fee hikes or special assessments, they can be more palatable if the board and community members understand why and when the money is needed.

Frequent and clear communication about the financial performance of reserve funds can also ensure that HOA board members have a clear picture of the association's financial situation, as well as the information necessary to make future investment decisions. Encourage the board to make meetings accessible to all homeowners, and publish meeting minutes for those unable to attend.

Educate HOA board members

While HOA board members typically come to the role with a desire to improve their community, they may have varying levels of the financial or legal expertise required to best perform in their role. This is another area where your community association management company can deliver added value, providing opportunities for the education and training of new and long-term board members.

In addition to keeping the board informed of any relevant legal or regulatory requirements, it may also be helpful to spend time with less experienced board members to help them understand the nuances of HOA banking, how to read a reserve study or how to make sense of financial statements.

Choose an experienced banking partner

When it comes to managing HOA reserve funds, it's helpful to work with a financial institution that specializes in community association banking. Look for bankers who understand the unique aspects of this industry and who are willing to interact directly with homeowners. In some cases, you'll also want someone who has experience managing large funds.

"I'm not aware of any other bank besides First Citizens that has reserve consultants who are 100% devoted to helping associations plan for their financial success," says Esposito. "Our team of dedicated reserve advisors understands the unique needs of community associations and is focused on providing consultative advice, specific to reserve planning."

Key takeaways

• A thorough reserve study can serve as a blueprint for a homeowners association's long-term financial needs.
• Liquidity is key. HOAs should separate the money needed for short-term operating expenses from their reserve funds.
• When managing their investments, HOAs should look for ways to grow their funds without compromising safety. One way to do that is to keep funds in bank accounts with FDIC protection. Likewise, look for an institution that specializes in HOA banking.
• Your community association management company should communicate frequently and clearly about the financial performance of HOA reserve funds.