2025/2026 California HOA reserve requirements

What are HOA reserves?

HOA reserves are funds set aside by a homeowners association to pay for major repairs and replacements of common area components. Under California HOA reserve requirements, every association must maintain a financial cushion for predictable long-term expenses like roof replacements, pool resurfacing, repaving, or elevator repairs.

These funds are separate from the operating budget, which covers routine maintenance and day-to-day costs. Without properly funded reserves, HOAs risk special assessments, deferred maintenance, or financial strain on homeowners.

In California, reserves are a legal requirement. The state’s Civil Code outlines how associations must study, plan for, and report on reserve funding each year.

This article is not intended to and does not constitute legal advice or create an attorney-client relationship. Board members should consult their association’s attorney to discuss the legal implications of their decisions or actions prior to proceeding.
 

California HOA reserve requirements

California HOA reserve requirements are defined in the Davis–Stirling Common Interest Development Act, specifically Civil Code Sections 5550, 5560, and 5300. These laws require that every association:

• Conduct a reserve study at least once every three years
   
• Adopt and annually review a reserve funding plan
   
• Disclose the reserve funding level in the annual budget report

The purpose of these requirements is simple: to help boards plan for long-term expenses and protect property values across the community. A properly funded reserve demonstrates sound financial management and provides owners with confidence that the association is prepared for future maintenance.
 

What percent should HOA reserves be funded?

In California, most experts recommend that HOA reserves be funded at a level of at least 70%. Robert Nordlund, the founder and CEO of Association Reserves, explained that determining a reserve fund percentage is "relative" to your specific association needs because it requires a comparison of the reserve fund size and the reserve requirements size. A ratio known as "percent funded" is used to find the reserve fund percentage by comparing how the current reserve fund balance matches up to the association's reserve needs (also known as the fully funded balance).¹ By design, a reserve account grows over time through regular funding from a percentage of your assessments.
 

What can HOA reserve funds be used for?

HOA reserve funds may be used only for the maintenance, repair, restoration, or replacement of major components. Oftentimes, boards think of reserves as a general savings account; however, that is not the case. They’re only meant to pay for the replacement of a reserve component or asset that is already in existence, such as replacing asphalt streets.
 

The reserve study: A living, breathing component of your success

A reserve study assists with an association's long-term financial plan by considering the current status of the reserve fund and determining a regular funding contribution that will allow you to replace reserve components as needed. This study comprises two things: a comprehensive physical analysis of the current condition of your community's assets and a detailed financial analysis.

Your community's reserves are important for keeping common area assets like clubhouses, lobbies, and swimming pools in good condition. A reserve study specialist will assess the condition of these areas in your community with an eye toward identifying future replacement costs and will recommend how much should be contributed annually so you have funds available when they're needed most!

It is essential to treat your reserve study as a living, breathing document that should be regularly reviewed and updated annually, in compliance with California Civil Code 5550. It is important to remember that a reserve study only serves as a budgeting guide for current and future boards to use; however, ultimately, your board has the power to adjust wherever you see fit.

"For example, your reserve study may indicate that a roof should be replaced in 30 years. If you are 28 years in, it still is in great condition, and you've done all the preventive maintenance, inform your reserve analyst that you believe the remaining life of the roofs can be extended because of the routine maintenance that you have performed over the years. If your reserve analyst agrees that the life can be extended, you can decide to get another few years out of it and adjust that component accordingly in the study."

HOLLY MADDALENA, CMCA, AMS, PCAM, Senior Vice President, Community Management - Orange County

Important! FirstService Residential recommends conducting regular reserve study reviews and onsite inspections with reserve and engineering specialists to confirm that you're not missing any new developments or crucial upgrades.
 

Determining maintenance vs. reserve components  

Properly categorizing your community's common area components is one of the challenges that come with managing reserves. For example, some items will require regular maintenance, such as pressure washing sidewalks and window cleaning, whereas others such as infrastructure items like roofs and mechanical equipment will need to be replaced as time passes. It's important to know the difference between maintenance and replacement costs. Maintenance items can be done on a regular basis and are included in your annual operating budget.

On the other hand, replacements will require additional funds from HOA reserve funds so that their expense is spread out over time. This way you don't get stuck paying full price twice: once during installation and once again in the future.
 

What is a “useful life”?

Every component has a useful life given to it by the manufacturer. "Useful life" refers to the length of time that a component serves its original purpose. While the manufacturer may estimate the expected useful life of a component to be a particular number of years, many factors can affect that estimate, such as environmental effects, wear and tear, revised regulations or obsolescence. Inadequate maintenance will reduce a component's useful life. As a result, the component will need to be replaced much sooner — usually before the association has set aside enough money in its reserve fund.

Did you know? There are several ways to test the useful life of a component, including vibration analysis, thermal imaging, laser shaft alignment, trend analysis, and oil sampling and analysis. Work with your property management company and engineer or maintenance team to explore these options and more.
 

Frequently asked questions about reserve studies

How much money can an HOA have in reserve?

There’s no set limit under California HOA reserve requirements. The goal is to fund the reserves to a level that can meet projected expenses for repairing or replacing major components. Financial professionals often recommend funding at least 70%–100% of the fully funded balance, depending on the age and size of the community.
 

What are the risks of underfunded reserves?

Underfunded reserves can lead to deferred maintenance, higher special assessments, and reduced property appeal. Under California HOA reserve requirements, associations must disclose a summary of reserves in their annual report, so low funding levels are visible to owners and buyers.
 

What happens if an HOA fails to complete a reserve study?

Failing to perform or update a reserve study violates California HOA reserve requirements and may expose the board to financial or legal risk. It can also make it harder for owners to sell their homes, as lenders and buyers often request current reserve disclosures.
 

How do property managers help with compliance?

Professional management companies play a major role in meeting California HOA reserve requirements. They help schedule studies, gather maintenance data, track component costs, and distribute required disclosures to members. This helps keep the board organized and compliant with California HOA laws year after year.

At FirstService Residential, we help communities across California stay compliant with every aspect of California HOA reserve requirements, from coordinating reserve studies to planning budgets and managing long-term funding strategies.

With more than four decades of experience in California property management, we understand the importance of maintaining well-funded reserves to protect both property values and residents’ peace of mind.

Contact FirstService Residential today to learn more.

Bibliography

1. Nordlund, Robert. 2011. "What Exactly is Percent Funded?". ReserveStudy.com. https://www.reservestudy.com/resource/article/what-exactly-is-percent-funded/ 

Disclaimer: This article is provided for information purposes only and does not constitute legal advice.