Welcome to our discussion where we’re going to be talking about the legal obligations of HOA boards with respect to reserves. When hearing about legal obligations, most people think about state law, and that is indeed part of it, but what we’re going to talk about today is much more than state law. In fact, we’ll touch very little on the checkerboard of various state laws across the country addressing reserves, and that’s because state laws aren’t the things that primarily drive reserve planning or reserve funding. By the end of today’s webinar, I believe you’ll learn that reserve funding is foundational to this entire concept of community association living and the community association structure of home ownership.
Transcript
Robert Nordlund:
Well, thank you, Jenn, and welcome everyone. Thank you for joining us for today’s discussion. We’re going to be talking about the legal obligations of HOA boards with respect to reserves.
When most people hear the phrase “legal obligations,” they immediately think about state law. State law is certainly part of the conversation, but it’s actually a relatively small part of what we’ll be discussing today. We’re going to spend very little time talking about the patchwork of reserve laws across the country because, in reality, state statutes are not the primary force driving reserve planning or reserve funding.
By the end of today’s webinar, I think you’ll see that reserve funding is actually foundational to the entire concept of community association living and the community association model of homeownership.
Normally our webinars follow a traditional slide presentation that takes us step by step through the material. But as Adrian and I prepared for today’s session, we realized our discussions were flowing naturally, and the conversation itself was more informative than simply walking through slides. So today we’re going to have that conversation right in front of you.
Adrian, welcome to the program.
Adrian Adams:
Thank you, Robert.
Robert Nordlund:
Let’s begin by talking about a board’s fundamental responsibility. If state law isn’t the primary authority, then what is?
Adrian Adams:
The governing documents are the first place to look. The impact of state laws varies from state to state. In California, for example, we have an extensive body of statutes governing community associations, and every year the legislature seems to add more.
But regardless of the state, your governing documents—the CC&Rs and your bylaws—have a tremendous impact on board responsibilities.
More recently, however, two other forces have become major drivers of reserve planning: Fannie Mae and the insurance industry.
Both of those changes were triggered by the collapse of Champlain Towers South in Surfside, Florida, in 2021.
Robert Nordlund:
2021. Five years ago.
Adrian Adams:
That’s right. Nearly one hundred people lost their lives, and the collapse sent shockwaves throughout the nation and throughout our industry.
Fannie Mae became especially interested because it purchases mortgages on the secondary market. A lender originates a loan for someone purchasing a condominium, then sells that loan to Fannie Mae. That gives the lender more capital so they can continue making additional loans.
After the Champlain Towers collapse, Fannie Mae suddenly found itself asking an important question: What happens if the owners paying these mortgages are no longer able to do so because of catastrophic building failures?
That concern shifted the focus toward the condition of condominium properties. Were associations maintaining their buildings? Were they conducting reserve studies? Were they adequately funding reserves?
To answer those questions, Fannie Mae developed a lender questionnaire that’s now used throughout the country. Lenders review condominium associations using that questionnaire before approving loans, making reserve funding and building maintenance major factors in the lending process.
In fact, Robert, Fannie Mae recently strengthened those reserve funding requirements.
Robert Nordlund:
Yes. In March of 2026, Fannie Mae and Freddie Mac increased their minimum reserve funding guideline for condominium associations from ten percent of the total operating budget to fifteen percent.
Now, that may not sound like a significant change, but in reality, most condominium associations should already be contributing somewhere between fifteen and forty-five percent of their total budget toward reserves.
I like to compare it to seatbelt laws. Years ago, automobiles had only lap belts. Later, shoulder belts were added. If you’re already driving safely, adding a shoulder belt doesn’t dramatically change how you drive, but it provides additional protection.
The same principle applies here. Raising the minimum from ten percent to fifteen percent doesn’t eliminate the need for boards to properly fund reserves. It simply establishes a stronger minimum standard.
Boards still need to fund reserves based on the actual needs of their communities.
Someone once explained the mortgage industry to me using the example of a neighborhood gas station. The station doesn’t drill for oil—it simply resells gasoline that someone else has produced.
Similarly, your local lender originates mortgages, but in many cases sells those loans to Fannie Mae or Freddie Mac, who become the long-term holders of those mortgages. That makes them one of the largest participants in the mortgage market.
Their concern isn’t simply about buildings collapsing. They’re concerned about large special assessments, deferred maintenance, and whether homeowners will still be able to make their mortgage payments if associations face major financial problems.
Adrian Adams:
Exactly.
Large special assessments increase the likelihood that homeowners will default on their loans, which directly affects the mortgage market.
That’s why reserves have become such an important issue for Fannie Mae.
Insurance companies have also become increasingly interested because they’re evaluating risk. They want to know whether associations are properly maintaining their common areas or allowing deterioration to continue unchecked.
Right now, Fannie Mae and Freddie Mac are probably the largest drivers behind these changes, but insurance companies are following closely behind.
Robert Nordlund:
I’m glad you brought up insurance because they’re facing the same concerns.
The Champlain Towers collapse resulted in enormous insurance losses. At the same time, insurance carriers continue to experience substantial claims from wildfires, hurricanes, floods, and other catastrophic events.
Insurance premiums have increased dramatically, and we want our audience to understand that they have some influence over those costs.
If your association can demonstrate that it’s proactively maintaining the property—that you’re not simply waiting for components to fail—you may be viewed as a better insurance risk.
In today’s environment, every opportunity to reduce insurance costs is worth pursuing.
Take care of your property. Perform preventive maintenance. Show your insurance carrier that your association is responsibly managing its assets.
Adrian Adams:
Absolutely.
The insurance settlement resulting from the Champlain Towers collapse exceeded $1.2 billion.
Insurance companies have taken significant losses in recent years from natural disasters, but they’re also paying close attention to aging infrastructure.
The condominium industry really expanded during the 1960s, 1970s, and 1980s. Those buildings are aging, and components that were often overlooked decades ago are now reaching the end of their useful lives.
That’s one reason reserve studies have become much more important.
Robert, the National Reserve Study Standards were updated after Champlain Towers. Can you explain what changed?
Robert Nordlund:
Certainly.
The National Reserve Study Standards were revised in 2023 following the Champlain Towers collapse.
Previously, reserve funding relied on what we referred to as the Four-Part Test. The revised standards broadened that into a Three-Part Test, making it easier for associations to fund significant one-time repairs through reserves.
Historically, reserve funding focused primarily on recurring replacement projects. Now, boards have greater flexibility to use reserve funds for major repairs that protect the property.
I think that’s a tremendous improvement because we want boards to have the financial ability to maintain their buildings properly.
Adrian Adams:
Exactly.
Reserves are meant to be spent.
They’re not intended to sit untouched forever.
Boards should accumulate reserve funds so they can replace roofs, repair plumbing systems, maintain structural components, and perform all the major projects necessary to keep the community in good condition.
If those projects aren’t completed, deferred maintenance eventually results in catastrophic failures—and emergency special assessments.
Robert Nordlund:
One reason we’re not focusing on state laws today is because deterioration doesn’t recognize state boundaries.
Whether you’re in Florida, Georgia, South Carolina, or California, Mother Nature and Father Time don’t care where the property is located.
Adrian Adams:
That’s exactly right.
Climate certainly affects deterioration differently. Coastal environments, desert climates, mountain communities—they all experience different challenges.
That’s why reserve studies are so valuable. They help boards understand what components they have, how long those components are expected to last, how much replacement will cost, and how much money needs to be accumulated before those projects become necessary.
Robert Nordlund:
I think we’ve laid a pretty good foundation there.
Let’s move on and talk specifically about the role of board members.
The legal documents define the common areas, the private spaces, and how the association is run. You touched on that when discussing responsibility. Generally speaking, homeowners are responsible for their own homes and their private living spaces, but it’s the board that’s fundamentally responsible for operating and sustaining the corporation.
Would you agree that’s a fair blanket statement?
Adrian Adams:
Absolutely.
The moment someone is elected or appointed to the board, they become a fiduciary.
As homeowners, people generally don’t have any heightened legal responsibilities. They can vote in their own self-interest, and quite often they do. If homeowners are asked to vote on a special assessment, many will vote no—especially if the repair doesn’t affect their own building.
Robert Nordlund:
Especially if it’s the building next door.
Adrian Adams:
Exactly.
Board members, however, don’t have that luxury. They are held to a much higher legal standard. They must put the interests of the association ahead of their own personal interests.
They may not want to approve a special assessment. They may not want to personally pay a special assessment. But if repairing the elevators, replacing the roof, or addressing structural safety issues is in the best interest of the community, then that’s the decision they have to make.
Sometimes those decisions require emergency special assessments.
I currently represent associations dealing with emergency assessments because critical repairs were postponed for too long.
One of the primary fiduciary duties of every board member is the duty of care. That includes investigating the condition of the property, exercising due diligence, and making informed decisions.
That’s exactly where reserve studies come into play.
As part of their due diligence, boards need to know:
- What components they own
- How much useful life remains
- What replacement will cost
- How much money needs to be accumulated
Those are all questions answered by a reserve study.
Robert Nordlund:
Are reserve studies required in every state?
Adrian Adams:
No. Only about half the states require them.
Personally, I think that’s a mistake. Every state should require reserve studies.
Robert Nordlund:
And that’s really one of the larger themes of today’s conversation.
Across the country we have this checkerboard of different laws.
Some states require reserve studies.
Some require reserve disclosures.
Some require reserve funding.
Others don’t require much of anything.
But that’s almost trivia compared to the bigger question.
The real issue is the fundamental responsibility of a community association.
Whether or not state law specifically requires it, shouldn’t every association understand what assets it owns and how much money it needs to maintain them?
Adrian Adams:
Exactly.
Even California—which has some of the strongest reserve requirements in the country—doesn’t actually require associations to maintain a particular funding level.
That’s why Fannie Mae has become such a significant influence nationwide.
Associations should be performing reserve studies regardless of whether state law requires them because it’s part of fulfilling their fiduciary responsibilities.
They need to understand what they own and what it will cost to maintain those assets.
Robert Nordlund:
Let’s stay with this idea of becoming a board member for just a moment.
Imagine you’re simply a homeowner. You purchased Unit 13 because it’s close to work, across from the park, and in a good school district. Life is pretty straightforward.
Then one day you raise your hand and volunteer to serve on the board.
That’s really a night-and-day change, isn’t it?
Adrian Adams:
It absolutely is.
Your focus shifts from your own home to the community as a whole.
Community associations exist because people collectively own common areas. Someone has to maintain those common areas.
It’s not the city’s responsibility.
It’s not the county’s responsibility.
It’s not the state’s responsibility.
It’s the association’s responsibility.
And the association is governed by its board of directors.
That means the board has to prepare budgets, evaluate the common areas, determine what maintenance is necessary, and make sure those responsibilities are fulfilled.
Unfortunately, too many boards defer decisions because they don’t want to raise assessments on their neighbors.
Personally, I believe that’s one of the contributing factors that ultimately led to the Champlain Towers tragedy.
Repairs were deferred year after year after year until the problems became overwhelming.
Robert Nordlund:
Let’s talk a little more about the board itself.
Imagine a five-member board.
They look around the room and decide who’s good with numbers.
“You’re the treasurer.”
Someone else enjoys organizing social activities.
“You handle the Fourth of July picnic.”
People naturally gravitate toward responsibilities that match their interests or talents.
But the reality is that board members are rarely experts.
They don’t necessarily know why the flowers at the entrance died.
They don’t know which roofing system performs best.
They don’t know how long a plumbing system should last.
That’s why boards need to rely on experts.
They should consult their landscaper.
Their roofer.
Their painter.
Their attorney.
Their community manager.
Their insurance professional.
Their reserve specialist.
As a board member, shouldn’t you always be seeking advice from the professionals who have the expertise?
Adrian Adams:
Absolutely.
Technically, a board could prepare its own reserve study.
But I think that’s a terrible idea.
The liability is simply too great.
A professional reserve study company has developed templates over many years.
They know what components to inspect.
They understand different construction materials.
They know the expected lifespans.
They understand the differences between various plumbing systems, roofing materials, structural components, and mechanical systems.
That’s knowledge most volunteer boards simply don’t have.
I strongly encourage every association to hire an independent reserve study company.
Robert Nordlund:
Just because you can do something doesn’t mean you should.
You and I could probably paint a wood fence ourselves.
But let’s be honest—it would probably look like you and I painted it.
The same is true for painting the iron fencing around the pool.
Sure, we could buy brushes and paint at the hardware store.
But would that really be in the best interest of the association?
Probably not.
Adrian Adams:
That’s a great comparison.
We’re seeing similar questions now about artificial intelligence.
Can someone ask ChatGPT for legal advice?
Technically, yes.
Should they?
Absolutely not.
There are some areas where professional expertise is simply too important.
Legal advice is one.
Reserve studies are another.
And once a reserve study is completed, the board actually has to fund it.
That’s the critical point.
The study itself doesn’t solve anything if the board refuses to contribute money toward reserves.
Robert Nordlund:
Exactly.
It takes courage.
First, the courage to find out what you’re facing.
Then the courage to ask questions.
How much will it cost?
What needs to be repaired?
What should we be planning for?
And finally, the courage to act.
Hire the contractor.
Fund the reserves.
Spend the money when it’s appropriate.
Because the roof is getting older every month.
Time keeps moving.
I sometimes compare it to a NASCAR race.
Mother Nature and Father Time are circling the track lap after lap.
Meanwhile, if the board is sitting in the pit wondering what it should do…
Adrian Adams:
…they’re losing the race.
Robert Nordlund:
Exactly.
You can’t stop deterioration by thinking about it.
You have to fund the work.
I think this is a good point to transition into what boards should actually do now that we’ve established these responsibilities.
We’ve talked about the larger forces driving reserve planning.
We’ve talked about fiduciary duties.
So now the question becomes…
What should boards actually do?
Adrian Adams:
I think we’ve already touched on the first step, which is getting a reserve study completed and then actually funding it.
If an association doesn’t fund its reserves, several things are almost guaranteed to happen.
First, somewhere down the road, they’re going to face large special assessments. The longer repairs are deferred, the more expensive they become.
Second, deferred maintenance and underfunded reserves eventually begin driving down property values. That’s important because for many homeowners, their home is their largest investment. Some are planning to retire using that equity. Others intend to sell in the future.
When buyers see deferred maintenance or weak reserves, the market responds. Property values suffer.
So even though raising assessments may be unpopular in the short term, it’s actually better for everyone over the long run.
That’s one of the board’s responsibilities. Directors have to step up and make those difficult decisions.
Robert Nordlund:
I think that’s where courage comes in.
As you mentioned earlier, the board’s responsibility is to take care of the common areas. Somebody has to do it, and ultimately that responsibility rests with the board.
We also talked about special assessments. Insurance companies don’t like deferred maintenance. Fannie Mae and Freddie Mac certainly don’t like the prospect of large special assessments because they want homeowners to remain financially capable of making their mortgage payments over fifteen or thirty years.
One thing I really appreciated at the beginning of today’s program was the polling we did. It showed a wide range of responses from boards regarding reserve funding. Some associations admitted they weren’t doing much. Others said they were doing okay. Some confidently said they were taking care of business.
That’s exactly what we see throughout the industry.
About one-quarter of associations nationwide have strong reserve funds. The interesting thing is that we rarely hear about those communities because they’re not making the news.
Champlain Towers South, on the other hand, had a very weak reserve fund. They weren’t putting up much of a fight against deterioration.
Based on our industry data, roughly one-third of associations fall into what we’d consider the weak funding category. Those are the communities that tend to make headlines. They’re the ones that give condominium associations and HOAs a reputation for deferred maintenance and massive special assessments.
Ultimately, reserve funding should simply be viewed as a usage fee.
Think about renting a car or staying at a hotel. Part of what you pay isn’t just for today’s use. A portion is set aside for future oil changes, new tires, carpet replacement, elevators, and building maintenance.
Community associations work exactly the same way.
Reserve funding is simply part of what it costs to own and maintain real estate.
Adrian Adams:
Another consequence that we haven’t mentioned yet is that Fannie Mae can effectively blacklist an association.
When that happens, lenders become unwilling to issue conventional loans within that community.
Here in California, we represent associations that have already found themselves on that blacklist.
Robert Nordlund:
Think about that for a moment.
The association was probably trying to save money by avoiding reserve funding and postponing maintenance.
Now they’re paying legal fees to dig themselves out of the hole they created—and they still have to repair the balconies, replace the roof, and complete all the maintenance they postponed in the first place.
Adrian Adams:
Exactly.
They’re facing special assessments.
They’re facing higher legal expenses.
Repair costs continue increasing.
Deferred maintenance doesn’t help anyone. It simply makes every future problem more expensive.
I have an association right now that had to impose an emergency special assessment after experiencing a partial balcony collapse.
Now every balcony has to be inspected and repaired.
Homeowners are understandably upset. Some are trying to undermine the board.
But the reality is that this is exactly what happened at Champlain Towers. Necessary repairs kept getting delayed until eventually the building collapsed.
It’s much better to address maintenance proactively—even if it’s unpopular—than to wait until you’re dealing with emergency assessments, lawsuits, legal fees, and blacklisting.
Robert Nordlund:
Deferred costs never disappear.
They simply accumulate.
Inflation makes projects more expensive.
Deferred maintenance increases the scope of repairs.
Instead of simply replacing a roof, now you’ve got to replace damaged underlayment because years of leaks caused additional deterioration.
Instead of repainting the building, now you’ve got to repair dry rot before you can even begin painting.
Everything becomes more expensive.
As we’ve discussed before, associations typically need to dedicate somewhere between fifteen and forty-five percent of their annual budget toward reserves.
That’s a significant portion of the budget.
But owning and maintaining real estate is fundamentally expensive.
That’s simply a reality of community association living, regardless of what state you happen to live in.
Every year, three things are changing simultaneously.
Project costs change.
The condition of your components changes.
The amount of money in your reserve account changes.
Because all three are constantly moving, it’s only logical that reserve studies should be updated regularly.
National best practices recommend a reserve study update every year, with a full site inspection every third year.
That recommendation isn’t driven by state law.
It’s driven by reality.
Mother Nature and Father Time never stop working.
Those are the opponents every association is facing.
And Adrian, boards have both the legal responsibility and the fiduciary obligation to respond appropriately.
Adrian Adams:
Absolutely.
One area we emphasize heavily is safety.
Many of the building components that fail first involve water intrusion—roofs, windows, plumbing systems.
Water intrusion leads to mold.
Mold leads to litigation.
Personal injury claims become incredibly expensive.
Insurance premiums rise—or insurance coverage disappears altogether.
Earlier, Jenn conducted a poll showing roughly one-third of attendees believed their associations were properly funded.
Is that fairly consistent with what you see nationwide?
Robert Nordlund:
It’s difficult for us to know precisely because the associations we work with are generally the ones seeking professional help.
But based on our experience, roughly one-quarter of associations across the country are well funded.
Seeing over thirty percent of today’s audience report healthy reserves was actually encouraging.
It tells me that many associations are moving in the right direction.
When reserve funding is treated like a monthly usage fee, the fear of special assessments largely disappears.
Adrian Adams:
If that means nearly half the nation’s condominium associations remain underfunded, I think we’re going to see more communities become blacklisted.
More associations will lose access to conventional financing.
More buyers will be limited to cash purchases.
And that will continue driving property values downward.
Everything we’ve talked about today comes back to the same basic responsibility.
Boards must take care of the common areas.
That means obtaining a reserve study.
And then funding it.
Robert Nordlund:
As we begin wrapping up today’s discussion, I think it’s important to remember the size and significance of what we’re talking about.
Community associations are often multi-million-dollar nonprofit corporations, yet they’re managed by well-intentioned volunteers. When you stop and think about it, that’s a tremendous responsibility.
What can go wrong?
Quite a bit.
We’ve talked about running out of money. And when an association runs out of money, questions of liability begin to surface because the board serves as the fiduciary for the association’s assets on behalf of all the homeowners.
What we want to see are communities that are well maintained, financially stable, and operating smoothly. We want to see consistent enforcement of rules, healthy reserve funds, reliable cash flow, functioning committees, and communities where board members are making thoughtful, informed decisions.
What we don’t want to see is an association focusing solely on keeping monthly assessments artificially low.
Mother Nature and Father Time have never lost a battle. They always win eventually.
Adrian Adams:
Exactly.
Low monthly assessments aren’t necessarily a bad thing—provided the association is still properly funding reserves and taking care of the property.
But if assessments are kept low simply because the board doesn’t want to make difficult decisions, then eventually those decisions will be made for them.
And that’s when lawsuits begin.
Personally, I believe we’re going to see more lawsuits filed against boards for breaches of fiduciary duty.
Now, the Business Judgment Rule generally protects volunteer board members from personal liability, but that protection depends on directors acting in good faith, exercising reasonable diligence, conducting proper investigations, and making decisions that are in the best interests of the association.
That’s exactly where reserve studies become so important.
Obtaining a professional reserve study is part of a board’s due diligence.
If boards ignore that responsibility, they may find themselves exposed to personal liability.
Robert Nordlund:
Let me ask a question that I know many board members are thinking.
What if someone says, “Our homeowners simply can’t afford higher assessments?”
Adrian Adams:
I’ve actually been involved in that exact situation.
I served as an expert witness in a lawsuit involving an association whose board refused to raise assessments for years.
They deferred maintenance over and over again.
They contributed almost nothing toward reserves.
Eventually, a major rainstorm caused widespread water intrusion throughout the community.
Lawsuits followed almost immediately.
Ironically, the board believed they were protecting homeowners living on fixed incomes by keeping assessments low.
But had they implemented modest annual increases over time, those homeowners would have had options. They could have planned ahead. Some might have chosen to sell before costs became overwhelming.
Instead, the association was hit with massive special assessments, extensive legal expenses, and significant repair costs.
Many homeowners simply couldn’t afford the financial burden.
Some walked away from their homes.
Others lost the investments they had spent decades building.
The very people the board was trying to protect suffered the greatest losses.
That’s why properly funding reserves and maintaining the property is ultimately in everyone’s best interest.
It’s the board’s responsibility.
Robert Nordlund:
I like the way you explained that.
Let me put it another way.
The board’s responsibility is to manage the association—not the personal finances of individual homeowners.
If the board focuses on properly managing the community, then Mrs. Johnson in Unit 14 can decide, on her own terms, that it’s time to sell her condominium, move closer to her grandchildren, or choose housing that’s more affordable.
She can sell while her property is well maintained and commands its full market value.
That’s a much better outcome than waiting until balconies are closed, major repairs have been delayed, a $30,000 special assessment arrives, and she’s forced to sell under financial pressure.
That’s not helping your neighbors.
That’s not being a good steward of the community.
Adrian Adams:
Before we finish, I’d like to mention one additional resource.
Our website is available free of charge to anyone interested in learning more about community associations. It contains an enormous amount of educational information—probably more than any other association law website in the country.
We’re also preparing to launch several new features.
One incorporates artificial intelligence to make information easier to locate.
Another will allow the entire website to be translated into virtually any language, making our educational resources accessible to homeowners and board members regardless of the language they speak.
Robert Nordlund:
That’s terrific.
Of course, those resources are focused on California law.
From our perspective as a national reserve study provider, the legal principles we’ve discussed today apply broadly, but when it comes to state-specific legal questions, homeowners and boards should always consult qualified legal counsel within their own state.
Adrian Adams:
Exactly.
California has some of the most comprehensive association laws in the country, but every state is different.
Boards should absolutely become familiar with their own state’s statutes and governing documents.
Robert Nordlund:
Here at Association Reserves, we’re committed to helping boards understand reserve planning and funding.
Today’s webinar has been recorded, and you’ll be able to find it on our website as well as on YouTube.
We also have numerous educational resources available, including our book on reserve studies and reserve funding, which is available through Amazon.
And if you enjoy this kind of discussion, I’d encourage you to check out our weekly podcast, HOA Insights: Common Sense for Common Areas.
Each week we spend about thirty minutes discussing practical issues facing HOA and condominium board members, always with the goal of encouraging and equipping volunteer leaders to make better decisions for their communities.
You can find the podcast on all major podcast platforms or visit hoainsights.org to learn more.
With that, I’ll turn things back over to Jenn, who will coordinate our question-and-answer session.