Scott Brady is co-owner and principal of Progressive Association Management, a CACM-member HOA management company serving 228 communities and nearly 15,000 homeowners throughout Southern California. Since founding the association management division in 2020, Scott has grown the company into the fastest organically growing association management firm in California by limiting manager workloads, providing full back-office support, and holding every team member accountable to documented daily service standards. |
Your monthly assessments cover current operating expenses such as water, electricity, management fees, and other contracts. A portion of those assessments should also be directed to the association’s reserves, which is a savings account set aside for future repairs and replacements of the association’s assets. Those assets are the common areas.
Who decides what qualifies as a common area? That is determined by the community’s governing documents.
What Are Common Areas?
It is the legal responsibility of your board to make the best business judgments to protect the assets of the corporation they lead. The corporation is the association, and the assets are the common areas. Typical common areas include:
- Roofs
- Interior plumbing
- Community pool
- Streets
- Lighting
- Landscaping
- Painting
- Exterior walls
- Balconies
The common areas of every association are listed in the CC&Rs that “run with the land,” meaning they are accepted by any buyer when they purchase in that community. They can only be changed by a supermajority vote of all owners, 67%, which is a high bar by design.
Who Pays and How?
Once the association’s responsibility for the common areas is established, the reserve study determines the best approach for paying for current repairs and funding future replacements.
Current repairs and maintenance are paid out of the operating account. These include the management company, landscaper, utilities, insurance, and other obligations due when services are rendered. Monthly dues fund these payments. The board directs the management company to collect dues, maintain an operating bank account, and pay the bills. They receive monthly financials that include a profit and loss statement, balance sheet, budget variance report, check register, and bank statements. As stewards of the community, the board should review these financials regularly.
For future repairs, replacements, and emergencies, the board largely follows the recommendations of the reserve study as required by California law. A board must order a reserve study annually. For two out of every three years, the study can be completed at a desk. But every third year, a reserve study specialist must conduct an on-site visit to update the report. The purpose of that visit is to assess the current condition and aging of the common areas, updating two key variables in the report: how long until each item needs to be repaired or replaced, and what that repair or replacement will cost.
How Reserve Funding Works in Practice
Here is a simple example. If a specialist determines that a roof has an expected life of 20 years and will cost $500,000 to replace, the board needs to set aside $25,000 per year dedicated to that expense to be “fully funded” when the time comes. If inflation rises beyond what was projected, the specialist can adjust that figure at their desk. But if the on-site inspection reveals the roof is aging faster than expected and will need replacement in 15 years rather than 20, the specialist updates the timeline and the annual contribution accordingly.
What Happens When Reserves Are Underfunded
Communities run into serious financial trouble when they underfund reserves and do not have cash on hand when repairs or replacements are needed. For example, if an owner experiences a leak and the governing documents state the association is responsible for the pipe repair and any resulting unit damage under “walls in” coverage, but the board has kept dues artificially low and cannot cover the cost, they may decline the expense. The owner has every right to pursue legal action for reimbursement.
More commonly, the board will resort to a special or emergency assessment when funds fall short. A special assessment requires a majority vote of 51% of all owners. If the expense was unforeseen and not included in the reserve study, a simple board majority can pass an emergency assessment without owner input. Either way, owners must pay a lump sum to cover the expense. These assessments can range from as little as $5,000 to as much as $50,000 or more. A payment plan is sometimes offered but is not required. For owners on a fixed income, these assessments can cause real financial hardship.
The Bottom Line
The best way to avoid this situation is for the board to stay informed about the common areas they are responsible for, follow the reserve study recommendations, and maintain sufficient funds for the expenses that will inevitably arise. A proactive board protects not just the community’s assets but the financial wellbeing of every owner in it.
Have questions about how your association is managing its common areas or reserve funds? We are here to help.
