A Guide to California Reserve Study Laws: Understanding Your HOA's Financial Future

Table of contents

• Executive Summary
• Research Strategy
• Detailed Breakdown
• Forthcoming Changes
• HOA Board Checklist
• Property Manager Checklist
• Reserve Analyst Checklist

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Executive Summary: The Big Picture

In California, a reserve study is not optional; it's required by law. The goal is to ensure every community association has a clear picture of its long-term repair and replacement needs and a stable funding plan to meet them.

• Frequency: You must conduct a full reserve study with a site inspection every three years. In the years between, you must perform a financial update of the study.
• Funding: While the law doesn't mandate a specific funding level (like "100% funded"), your board must adopt a responsible funding plan. Underfunding can lead to special assessments and expose the board to liability.
• Disclosure is Key: The findings of your reserve study and your funding plan must be disclosed to all homeowners annually as part of the budget report.
• New Inspection Laws: Recent laws requiring inspections of balconies and elevated structures (SB 326) directly impact and must be integrated into your reserve study.

This guide breaks down California's reserve study laws in simple terms, helping you understand exactly what you need to do, how often, and why it's so important.

For HOA board members, property managers, and community association leaders in California, navigating the financial and legal landscape can be complex. This isn't just about saving for a rainy day; it's a legal requirement designed to protect property values and ensure the long-term health of your community.

Research Strategy

This briefing is based on an analysis of California's primary legal sources, including the Davis-Stirling Common Interest Development Act (California Civil Code §§ 4000-6150). For further reading and verification, we recommend visiting the official California Legislative Information website and authoritative resources like the Community Associations Institute (CAI).

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Detailed Breakdown: California's Reserve Study Requirements

Here’s a deeper look into the specific requirements under the Davis-Stirling Act.

Is a reserve study required or recommended?

Required. A reserve study is mandatory for nearly all community associations in California.

• Nuance: There's a very narrow exception for associations where the total replacement cost of major components is less than 50% of the association's gross budget for the fiscal year. This is extremely rare for a typical HOA or condo association. (Civil Code § 5550(a))

Frequency/Cadence: How Often?

You must follow a clear three-year cycle.

• Full Study (with Site Visit): At least once every three years, the board must commission a full reserve study. This involves a diligent visual inspection of the accessible major components the association is responsible for maintaining. (Civil Code § 5550(a))
• Annual Updates (No Site Visit Required): The board must review the reserve study annually and consider if any adjustments are necessary to the funding plan. This review should account for any changes in costs or timelines. (Civil Code § 5550(a))

Method: What's Involved in the Study?

The law specifies different levels of review.

• Onsite/Visual Inspection: This is the cornerstone of the full, three-year study. A qualified professional must visually inspect accessible components to assess their condition and remaining lifespan. This includes things like roofing, paint, paving, central heating/cooling systems, and other major assets.
• Financial Update: The annual reviews between full studies do not require a new site visit. These updates focus on the financial aspects: reviewing current reserve balances, recalculating funding needs based on inflation or new cost estimates, and adjusting the funding plan.

Who May Perform It?

The law is surprisingly flexible on who can perform the general reserve study, but much stricter for certain structural inspections.

• General Reserve Study: The statute does not require a specific license or certification (like the Reserve Specialist (RS) or Professional Reserve Analyst (PRA) designation) for the person or firm conducting the standard reserve study. However, the board has a fiduciary duty to hire someone competent and experienced. Using a credentialed professional is a widely accepted best practice.
• Balcony & Elevated Structure Inspections (SB 326): For condominiums with three or more units, inspections of "exterior elevated elements" (like balconies, decks, and walkways) must be performed by a licensed architect or structural engineer. The findings from this separate inspection must then be incorporated into the main reserve study. (Civil Code § 5551)

Applicability: Who Does This Apply To?

The law applies broadly to all forms of "common interest developments" (CIDs) in California. This includes:

• Planned developments (single-family home HOAs)
• Condominium projects
• Community apartment projects
• Stock cooperatives

There are no exemptions based on the size (number of units) of the association.

Funding & Disclosures: Managing and Communicating the Money

This is where the board's fiduciary duty is most critical.

• Funding Policy: The board must adopt a formal funding plan in an open meeting. This plan outlines how the association will meet its future obligations as identified in the reserve study. (Civil Code § 5560)
• Minimum Funding Levels: The law does not mandate a specific funding percentage (e.g., 70% or 100% funded). However, lenders like Fannie Mae and Freddie Mac often require at least 10% of the association's operating budget to be allocated to reserves for a project to be warrantable, which heavily influences homeowner financing. Being significantly underfunded can lead to loan denials for buyers and refinancing owners.
• Borrowing from Reserves: Using reserve funds for daily operating expenses is strictly regulated. The board must provide notice to members, document the reason for the "loan" and the repayment plan, and generally repay the funds within one year. (Civil Code § 5515)
• Owner Disclosures: Each year, the association must distribute an Annual Budget Report to all owners. This report must include a summary of the reserve study that clearly states:
  
  • The current reserve balance.
  • The current level of funding as a percentage.
  • The estimated cost to repair/replace all major components.
  • Any anticipated special assessments or loans required to fund the reserves. (Civil Code § 5300, § 5565)

Penalties & Risks: What Happens If You Don't Comply?

Non-compliance carries significant risks.

• Board Member Liability: Board members have a fiduciary duty to the association. Knowingly underfunding reserves or failing to commission a study can be seen as a breach of that duty, potentially leading to personal liability in a lawsuit.
• Lending & Insurance Issues: As mentioned, Fannie Mae, Freddie Mac, FHA, and VA have their own requirements. A non-compliant association can make it difficult or impossible for owners to sell or refinance their homes.
• Financial Distress: The most common outcome is financial instability, leading to large, unplanned special assessments that anger homeowners and can decrease property values.

Looking Ahead: Forthcoming Changes & Practical Concerns

• Forthcoming Changes: As of late 2025, there are no major bills pending that would fundamentally overhaul the core reserve study process. However, the regulatory landscape is always shifting, particularly around building safety in the wake of events like the Champlain Towers collapse in Florida. Expect continued focus on structural integrity.
• The Impact of SB 326 (Balcony Law): This is the most significant recent development. Associations must not treat this as a separate "box to check." The findings from the structural engineer's report are critical inputs for the reserve study. A "clean" balcony inspection may not change much, but a report identifying required repairs will immediately impact the reserve funding plan.
• Inflation & Supply Chain: These are no longer abstract concerns. Reserve studies must now account for rapidly changing material costs and labor shortages. A study that is even two years old may be significantly out of date. Boards should discuss these factors with their reserve specialist during the annual updates.

Role-Based Checklists: Your Action Plan

For the HOA Board of Directors

Annually:

• [ ] Review the most recent reserve study and funding plan at a board meeting.
• [ ] Commission a financial-only update to the reserve study if it's an "in-between" year.
• [ ] Discuss and formally adopt the reserve funding plan for the upcoming year.
• [ ] Ensure the legally required "Assessment and Reserve Funding Disclosure Summary" is completed and included in the Annual Budget Report sent to all owners.
• [ ] Review any restrictions on borrowing from reserves before considering a transfer of funds.

Every 3 Years:

• [ ] Commission a full reserve study that includes a diligent, on-site visual inspection.
• [ ] Vet and select a qualified, credentialed reserve study provider.
• [ ] If applicable, ensure the SB 326 balcony inspection timeline is aligned with the reserve study, so the findings can be incorporated.
• [ ] Formally adopt the new, comprehensive funding plan.

For the Property Manager

Annually:

• [ ] Calendar the due dates for the annual reserve study update and the 3-year full study.
• [ ] Obtain proposals from qualified reserve specialists for the board's review.
• [ ] Assist the board in preparing and distributing the Annual Budget Report, ensuring all reserve disclosures are included.
• [ ] Document any board decisions related to the reserve study and funding plan in the meeting minutes.
• [ ] Maintain a complete record of all reserve studies and related financial documents. The recommended retention period is at least seven years, though some records should be kept permanently.

Every 3 Years:

• [ ] Coordinate with the selected reserve specialist to schedule the on-site property inspection.
• [ ] Provide the specialist with necessary association documents (governing documents, financial statements, maintenance records).
• [ ] Ensure the final reserve study report is presented to the board for review and adoption.

For the Reserve Specialist

• [ ] Clearly define the scope of work: Is this a full study with a site visit or a financial update?
• [ ] Request and review all necessary association documents to ensure an accurate component list and financial analysis.
• [ ] Conduct a diligent, on-site visual inspection of all accessible major components for a full study.
• [ ] Inquire about and integrate the findings from any recent SB 326 structural inspections into the reserve study analysis.
• [ ] Prepare a report that meets all requirements of the Davis-Stirling Act, including:
  
  • An itemized list of major components.
  • Their estimated remaining useful life and replacement cost.
  • A calculation of the association's percent funded.
  • A multi-year funding plan based on the analysis.
• [ ] Clearly state all assumptions made during the analysis (e.g., inflation rate, interest rate on reserve investments).

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