“In January we purchased our first condo and then received a notice to brace ourselves for a 17% hike in dues starting in July. The notice says that the fiscal year starts on July 1st and the reserves have been inadequately funded to cater to the building’s short and long-term maintenance and repair requirements. Could you help me better understand the reserve study report they provided us with? It looks like this is due to poor planning and not something new. Thank you for the useful advice on your website.”
California Civil Code section 5550 requires that HOAs perform a reserve study at least every three years to identify the necessary maintenance, repair, and replacement costs of major components of the property. The reserve study must include a funding plan that identifies the amount of money that the association needs to set aside each year to fund the reserve account adequately. Some HOAs are required to perform reserve studies annually or every two years based on the language in their CC&Rs.
Civil Code section 5550(b)(5) states that the reserve funding plan must take into account the estimated remaining useful life of each major component and the estimated cost to repair or replace them when they reach the end of their useful life. Examples of major components include: roofs, exterior walls and siding, foundations, windows and doors, elevators and escalators, HVAC systems, plumbing systems, electrical systems, pools and spas, and parking lots, carports, and garages. Of course, the components your HOA is responsible for depend on the CC&Rs so make sure you pay attention to them.
Civil Code mandates that HOAs must have an adequate reserve fund to cover the anticipated future maintenance, repair, and replacement costs, which should be reflected in the reserve study report. If the report identifies a shortfall in the reserve fund, the association needs to increase the dues to fund the reserve account adequately.
You did not provide a copy of the upcoming operating budget, so based on your email alone, a 17% increase solely attributed to a reserve deficit is quite alarming. From the reserve study, you are right, it looks like your HOA has been underfunding for a long time and frankly, 17% isn’t enough to make up the difference. They can’t go above 20% without the agreement of a quorum of the owners, so maybe 17% was an internal compromise. I would prepare yourself for steep increases annually and maybe even special assessments to get you leveled off.
Here are some other reserve study examples:
2022 – Annandale II (Agoura Hills, CA) [39.83% funded or a deficit of $8,475/unit. Under 40% shows significant weakness and long term failures to increase funding appropriately. Three 20% annual increases and special assessments should be expected to play catch up.]
2022 – Braemar (Thousand Oaks, CA) [75.1% funded or a deficit of $1,571/unit. Very healthy. 3% steady annual increases should be expected.]
2022 – Capri II (Oak Park, CA) [42.5% funded or a deficit of $3,726/unit. Under 50% shows weakness and long term failures to increase funding appropriately. Two 20% annual increases and special assessments should be expected to play catch up.]
2023 – Sterling Oaks (Oak Park, CA) [138% funded! Strong reserves. 3% steady annual increases should be expected but this may be able to be offset by investment returns which are holding steady at around 3.5%, not the 1% indicated in the report.]
Be wary of Boards of Directors that are willing to underfund reserves as the money has to come from somewhere and the only other place is special and emergency assessments. Would you rather be hit up to 20% monthly or thousands of dollars all at once? I believe that slow and steady wins the race.