HOA fees explained: what they cover and how boards set them

HOA fees fund two distinct pools: money for this year’s bills and money for future capital replacements. Most volunteer boards understand the first pool and underestimate the second. That gap creates liability.

What HOA fees actually fund

Every HOA assessment splits between two pools, even if your bank statement shows only one number.

Operating funds cover recurring annual costs: landscaping contracts, property insurance premiums, utilities for common-area lighting and pools, management company fees, and routine maintenance. These expenses repeat every year and are fully consumed within the budget period.

Reserve funds are savings toward future capital replacements. The clubhouse roof, the parking lot asphalt, the mid-rise elevator, the pool resurfacing — components like these last 15-30 years before replacement, and replacement costs run into the tens or hundreds of thousands of dollars. The reserve fund accumulates those dollars gradually, spread across every homeowner over the life of each component, rather than landing as a sudden special assessment.

California, Florida, Washington, and most other states require these two pools in separate accounts. Keeping both in one checking account is commingling, a statutory violation that exposes board members to personal liability.

How boards calculate the annual assessment

The annual budget process runs two tracks in parallel.

The operating budget starts with a list of known expenses for the coming year. Boards collect bids on landscaping contracts, review insurance renewal estimates, project utility costs, and total management fees. Divide the operating total by number of units and by 12 to get the monthly operating portion.

The reserve contribution comes from the reserve study, which lists every major component the HOA owns, estimates its remaining useful life, and projects its replacement cost. The study calculates the annual deposit needed to reach a target funding level, usually 100% funded or a board-approved threshold. That annual deposit, divided by units and months, becomes the reserve portion.

The monthly assessment is the sum of both portions. A board that calculates only the operating side and sets a low assessment to minimize homeowner complaints knowingly underfunds reserves, which is a breach of fiduciary duty.

State requirements for reserve funding

Reserve fund requirements have tightened over the past decade.

California requires HOAs to conduct a reserve study at least every three years using a licensed reserve analyst, maintain a separate reserve account, and disclose the percent-funded figure in the annual budget package delivered to homeowners.

Florida tightened its requirements after the 2021 Surfside condominium collapse. Condominiums three stories or taller now face mandatory structural integrity reserve studies and cannot waive reserve funding for structural components.

Washington requires reserve studies for communities above a unit threshold and requires boards to review reserve adequacy annually.

In states without specific reserve mandate statutes, most CC&Rs contain reserve funding obligations, and courts interpreting the fiduciary duty standard have included maintaining adequate reserves as part of ordinary care.

What drives fee increases

Three things drive assessment increases, and two of them are avoidable.

Insurance premiums have risen sharply in many markets. Landscaping and maintenance labor follows wage trends. Utilities climb. A board that held assessments flat for several years is absorbing cost increases that eventually force a correction.

A board that inherited an underfunded reserve — or kept reserves low on purpose — faces two bad options: a large assessment increase to build the reserve balance, or a special assessment when a capital expense comes due. Annual increases, even small ones, are less painful than either.

When a prior board deferred maintenance on common-area components, the repair cost lands on the current board’s budget.

The commingling problem

While building BoardStack, we found that HOA boards running both funds through a single bank account was the most common accounting error we encountered. Some used a single QuickBooks company file with no fund separation at all.

Reserve funds kept in the same account as operating funds can be spent on operating expenses, sometimes without anyone noticing. Board members who allow reserve funds to cover operating expenses, even by accident, face personal liability.

Fund accounting — the method built for nonprofits and HOAs — maintains separate pools with separate balances, separate ledgers, and separate reports. QuickBooks uses a single profit-and-loss framework. Adding categories and classes approximates fund separation but does not enforce it. Reserve money can post to operating expenses without any system warning.

HOA-specific accounting software enforces the boundary. A reserve transaction cannot post to an operating account. The reserve balance stays a separate, auditable figure — which matters when a homeowner or state auditor reviews your books.

Setting fees responsibly

1. Get bids on all operating contracts before the budget meeting.
2. Pull the current reserve study recommendation for the annual deposit.
3. Calculate the total assessment needed to fund operating expenses and the recommended reserve contribution.
4. If the result is a large increase, model a multi-year phase-in plan and record it in meeting minutes.
5. Approve the budget in a noticed board meeting and distribute the package to homeowners within the timeframe your governing documents and state law require.

Boards that document this process fulfill their fiduciary duty. Boards that set assessments based on what homeowners will accept, without calculating what reserves actually need, create liability for themselves and financial risk for every homeowner in the community.

DEFINITION

HOA Fee

A mandatory periodic payment made by homeowners to the association to fund community operations and capital reserves. Also called an assessment or maintenance fee. The amount is set annually by the board through the budget process and governed by the CC&Rs and state statute.

DEFINITION

Operating Fund

The account that holds funds collected for day-to-day community expenses: landscaping, utilities, insurance premiums, management fees, minor repairs, and administrative costs. Operating funds are consumed within the budget year. Most state statutes require operating funds to be kept separate from reserve funds.

DEFINITION

Reserve Fund

A separate savings account maintained by the HOA to cover major capital expenditures — roof replacement, repaving, elevator overhaul, pool resurfacing, and similar long-lived components. Reserve contributions are collected monthly as part of the regular assessment and drawn down when components need replacement.

DEFINITION

Special Assessment

A one-time charge levied on homeowners outside the regular monthly assessment when the reserve fund is insufficient to cover a capital expense. Most governing documents and state statutes require board approval and, above a dollar threshold, homeowner approval before a special assessment can be collected.

DEFINITION

Percent Funded

A metric from the reserve study that measures how well-funded the reserve account is relative to the fully funded ideal. A fully funded association has 100% of the theoretical depreciation of its components in the reserve account. Below 70% funded is generally considered underfunded. Below 30% funded is a red flag that may require disclosure to prospective buyers in states with reserve disclosure statutes.