Why reserves matter

What happens when reserves run short

When a major project can no longer wait and the reserve fund cannot cover it, a board is generally left with three imperfect options: a special assessment, a loan, or delaying the work. Deferred work rarely stays the same size. Putting off asphalt sealing can turn into a full repaving job, and skipping a paint cycle can turn into siding replacement, because the underlying deterioration keeps running while the decision sits on the table.

Whether your state sets a specific dollar or percentage funding floor, or only requires a study, disclosure, and review, varies by state. California law requires assessments sufficient to meet the association's obligations, without naming a specific reserve percentage.

"The association shall levy regular and special assessments sufficient to perform its obligations."

Source: Is Reserve Funding Mandatory?, Berding Weil

Reserves protect the board, not just the roof

Planning for major repairs is part of a board's fiduciary duty of care. Directors who make a good-faith, informed decision are generally shielded from personal liability under the business judgment rule, but that shield depends on the process behind the decision, not just the outcome.

"Disinterested, reasonably informed under the circumstances, and able to reasonably believe that the decision was in the best interests of the association."

Source: Fiduciary Duties 101, Limiting the Liability of the Board, communityassociations.law

A board that assesses well below its own reserve study's recommendation, with no documented reason, is in a weaker legal position than one that follows the study or explains in writing why it chose not to. The deviation is not automatically a problem. The lack of a documented reason is.

Underfunded reserves can block financing

Reserves also matter to anyone trying to sell or refinance a unit. Fannie Mae and Freddie Mac currently require a condominium association to put at least 10 percent of its budget toward reserves for the project to qualify for standard mortgage financing, a threshold rising to 15 percent for budgets effective on or after January 4, 2027, unless the association has a reserve study completed or updated within the past three years and is funding at its highest recommended level.

This is a lender underwriting rule, not a state-law mandate, so it applies on top of whatever your state and governing documents already require. An association that clears its own state's requirements can still fall short of what a lender will accept.