HOA Reserve Funding — What Owners Will Actually Pay

Most homeowners probably do not spend much time thinking about their HOA reserve study. They should.

Reserve funding ultimately determines whether owners pay for major repairs gradually through regular assessments—or are suddenly confronted with large assessment increases or special assessments because the money was not there when it was needed.

Nevada is now considering an important change to its reserve regulations. Section 6 of proposed regulation R091-25 would eliminate baseline funding, a method that can allow projected reserves to fall dangerously close to exhaustion. The proposal is a good step. The regulatory materials themselves describe baseline funding as a risky approach that can allow reserves to fall to zero and require a special reserve assessment when a major project arrives.

But changing the funding standard exposes another weakness in Nevada HOA law: We have never clearly defined what the board is supposed to produce each year when it reviews the reserve study and decides what owners need to pay.

The Reserve Study Is Only the Starting Point

Think of a reserve study as a long-range capital plan. It estimates when roofs, roads, gates, pools, walls, irrigation systems and other major common assets will need repair or replacement. It estimates what those projects will cost and calculates the funding needed over time. But the reserve study is not self-executing. Conditions change. A road expected to last another five years may need work in three. A roof may last longer than anticipated. Construction costs can increase. A project can change in scope. Maintenance can extend the useful life of an asset.

That is why Nevada law requires the board to review the reserve study annually and determine whether adjustments to the funding plan are necessary. That annual review should be important. But what exactly constitutes the “review”? Nevada law does not clearly say.

Does the board need to identify which projects are moving forward? Which are being delayed? Which cost estimates have changed? What contribution is now necessary? What did the board actually decide? Those questions become particularly important because the board's decisions determine how much owners will ultimately be assessed.

And Then There Is the “Reserve Budget”

Nevada law also talks about a budget for adequately funding reserves. NAC 116.415 goes further and expressly addresses the “budget to maintain the reserve.” Yet current law does not clearly require every association to prepare a separately identified document titled Reserve Budget.

That has created another ambiguity. Owners typically receive an annual operating budget and some form of reserve summary showing numbers such as:

• beginning reserve balance;

• annual reserve contribution;

• anticipated reserve expenditures; and

• projected ending reserve balance.

Those numbers are useful. But here is the unanswered question: Is that summary merely a summary of the reserve budget—or is the summary itself supposed to satisfy the board's entire reserve-budget obligation?

Nevada law does not make that nearly clear enough. And that matters because a summary can show you numbers without showing you the decisions behind those numbers.

Why Owners Should Care

Suppose your annual HOA materials say:

• Beginning reserves: $1.5 million

• Owner contributions this year: $300,000

• Expected reserve spending: $200,000

• Projected ending reserves: $1.6 million

That sounds reassuring. But what does it actually tell you? Not necessarily very much. What projects does the board intend to complete with that $200,000? Were projects in the reserve study delayed? Did estimated costs increase? Is $300,000 actually enough to keep the association on its required funding path? Did the board determine that more money is necessary but decide not to collect it? If the association is already underfunded, what is the plan for getting back on track?

A few numbers do not necessarily answer any of those questions. This is why reserve budgeting is important to owners, not just accountants and reserve specialists.

The New Nevada Rule Creates a Hard Question

Section 6 would strengthen Nevada's reserve-funding requirements. That is good. But imagine an older HOA that has been underfunding reserves for years. Its annual review determines that satisfying the new adequate-funding standard immediately would require assessments to increase dramatically. Perhaps owners would need to contribute another $200, $300 or more each month. What should the board do?

Simply ignoring the funding requirement is not acceptable. But demanding that years of accumulated underfunding be corrected in one year could impose severe hardship on owners. That is the problem Nevada needs to solve and owners should demand of their board even if the law does not require it.

Existing NAC 116.415 already points toward a solution. It says that when projected reserves are below the amount needed for adequate funding, the budget must explain the difference and how the board proposes to resolve it. But that requirement is too vague for the stronger funding standard Nevada is now considering. “We intend to increase reserves over time” should not be enough.

Owners Need a Real Recovery Plan

If an association cannot reasonably reach adequate funding immediately, the board should have to adopt a specific corrective funding plan. Owners should be told:

• How large is the funding deficiency?

• Why can't it reasonably be corrected this year?

• How much will reserve contributions increase?

• What projects are being accelerated, deferred or changed?

• How much progress will be made each year?

• When does the board expect the association to reach adequate funding?

And the board should have to revisit that plan regularly- preferable quarterly annually. That allows reasonable flexibility without creating another loophole. Because otherwise, “owner hardship” can become the next excuse for permanently inadequate reserves.

This is also why I believe Nevada should now require every association to prepare a separately identified annual document called simply: Reserve Budget

Current law does not expressly require that title or separate document. It should. This does not need to become another 40-page HOA report. A useful Reserve Budget could be short. It should tell owners:

• Where we started.

  • How much money is currently in reserves?

• What we are putting in.

  • How much will owners contribute this year?

• What we expect to spend.

  • What major reserve projects does the board presently expect to undertake?

• Where we expect to finish.

  • What will the projected reserve balance be?

• Are we adequately funded?

  • Does the board's plan comply with Nevada's reserve-funding requirement?

• If not, what is the recovery plan?

  • How much is the deficiency, what is being done about it, and when will compliance be achieved?

That is information an ordinary homeowner can understand.

A Summary Should Be a Summary

Nevada law permits associations to give owners summaries of their budgets. There is nothing inherently wrong with that. But the concept only works if there is an actual underlying budget being summarized. That leads to a very simple distinction:

A summary can summarize a Reserve Budget. The law should not leave everyone guessing whether the summary is also the Reserve Budget.

Requiring an identifiable Reserve Budget would eliminate that ambiguity. Owners would know what document to ask for. Boards would know what they are expected to approve. And NRED would know what document to examine when a reserve-funding complaint is filed.

Owners Should Also Know What the Money Will Be Spent On

There is another important piece of this. A reserve contribution is only half of a budget.

Spending is the other half. Owners routinely receive operating budgets showing expected spending on landscaping, insurance, management, utilities and other expenses. But reserve expenditures can be far larger, and owners often receive much less information about them. A board may expect to spend hundreds of thousands—or millions—on roads, roofs, walls, pools or other capital projects.

Owners should not have to reconstruct those plans months later by reviewing meeting minutes, individual contract approvals and financial statements. That is precisely the transparency problem identified in the reserve-budget recommendations already submitted to the Commission.

A simple annual Reserve Budget could identify major planned reserve projects, estimated costs and anticipated timing. That would connect three things that today can become disconnected: the reserve study to the board's annual decisions to the money owners are being asked to contribute.

Fannie Mae Is Already Moving in This Direction

This is not just a Nevada concern. Fannie Mae recently tightened condominium reserve requirements. Among other changes, it eliminated baseline funding for certain project reviews and, where the lender relies on a reserve study, requires the project's budget to include the reserve study's highest recommended reserve allocation.

Beginning January 4, 2027, Fannie Mae also increases the minimum reserve allocation under its Full Review percentage test from 10 percent to 15 percent of annual budgeted assessment income.

There is a warning in that approach. When reserve governance fails, outside institutions eventually respond with more rigid rules. And those rules can effectively transfer funding decisions from elected HOA boards to reserve specialists, lenders or regulators.

I would rather Nevada preserve legitimate board judgment. Boards should be able to decide that a project can reasonably be delayed, that maintenance has extended a useful life, that costs have changed, or that a project should be redesigned. But with discretion comes accountability. The board should have to show owners what it decided and demonstrate that its resulting funding plan works.

Section 6 Is Good — But Finish the Job

Nevada should eliminate baseline funding. But that should be the beginning of the reform, not the end. The Commission should also clarify the annual process: Reserve Study, Board Review, Funding Decisions, Reserve Budget , and Owner Summary

And if an association is not adequately funded: Deficiency, Corrective Funding Plan, Measurable Annual Progress, and Compliance

That would make Section 6 meaningful to the people ultimately paying the bills. Because reserve funding is not really about actuarial tables, funding methodologies or regulatory terminology. It comes down to a much simpler question for every HOA homeowner:

Is my association setting aside enough money today to pay tomorrow's bills—and if it isn't, what exactly is the board doing about it?

Owners deserve a clear answer. And Nevada should require one.

Readers will find my letter to the Commission on Section 6 here.