Your Idaho HOA Needs a Reserve Fund. Here’s why.

Developers establishing homeowners associations (“HOA”) often wonder whether they should conduct reserve studies or fund reserves. The answer is yes.

Idaho statutory law does not currently require HOAs to conduct a reserve study or have a reserve fund. However, if you’re a real estate developer or a member of an HOA board, you should still consider establishing a reserve.

Basics of HOA Reserve Funds

Reserves serve as savings accounts for HOAs. They can help fund future projects or repairs. Similar to an emergency fund for personal banking, reserves can also be used to provide some cushion for unforeseen circumstances like a fire or roof leaks. Unlike operating funds that focus on the day-to-day expenses of the community, reserves support the continuous improvement of the community and ensure that community members will be able to live comfortably.

HOA reserves often increase land value and quality of life. For example, reserve funds may be used for:

• Construction of new amenities neighborhood parks, swimming pools, or gyms
• Roof repairs or replacements for common area buildings
• Major landscaping projects
• Renovation of sidewalks

There is no “perfect” amount to have in a reserve account. Most HOAs determine the appropriate amount by conducting reserve studies every 3-5 years. Studies are completed by professionals who are aware of local and national economic trends, can assess the current condition of the HOA and its common areas, and make projections for the future based on the HOA’s budget.

An example of an extremely simple calculation could be saving for a $10,000 improvement 10 years from now. That would mean, each year, an HOA should be contributing $1,000 in reserve funds toward that project. Of course, reserve funds can become much more complex when you consider multiple improvement projects as well as factoring in saving for emergencies. Professionals should also account for taxes and inflation.

Benefits of Reserves

Reserve funds take an HOA from surviving to thriving. They provide funds to better the community rather than simply maintaining it. In the end, this will increase the neighborhood’s value and create more charming communities.

When HOAs do not have a reserve fund, they must compensate in some way. Often, this comes in the form of loans. Loans can be especially difficult for new HOAs because they require proof of a steady source of revenue and minimal debt. As with all loans, they come with interest and may require an interest in the property as collateral.

Another alternative to reserve funds is special assessments. These are usually issued by HOAs in “emergency situations” in which they do not have enough money to compensate for repairs. If done too often, this can end up angering the community. In worst-case scenarios, homeowners and tenants may move elsewhere, taking their money with them.

Without reserve funds, the HOA board may be forced to postpone repairs and improvements. The neighborhood may lose curb appeal, property values, and homeowner satisfaction. Over time, this can snowball, leading to rundown neighborhoods that have little to no chance of recovering.?

Let’s Take a Look at Other States

Since Idaho has not addressed reserve funds at the legislative level, developers may find it helpful to look to other states’ recommendations.

Reserve funds and reserve studies are the norms in many other states. Utah, Nevada, Oregon, Virginia, Hawaii, California, and Washington all have statutory requirements for HOAs to conduct some form of reserve study. Some states have very specific mandates for budgeting federal reserves. For example, reserve contributions must make up at least 10% of the HOA’s annual budget in Ohio.

The Utah Supreme Court in Davenport at Pilgrims Landing Homeowners Association v. Davencourt at Pilgrims Landing, LC, ?found that a developer has a limited fiduciary duty when the developer establishes and initially controls a homeowners association. The Utah Supreme Court, adopting language from the Restatement (Third) of Property, stated,

“Until the developer relinquishes control of the association to the members, the developer owes the following duties to the association and its members:?

1. to use reasonable care and prudence in managing and maintaining the common property;
2. to establish a sound fiscal basis for the association by imposing and collecting assessments and establishing reserves for the maintenance and replacement of common property;
3. to disclose the amount by which the developer is providing or subsidizing services that the association is or will be obligated to provide;
4. to maintain records and to account for the financial affairs of the association from its inception;
5. to comply with and enforce the terms of the governing documents, including design controls, land-use restrictions, and the payment of assessments;
6. to disclose all material facts and circumstances affecting the condition of the property that the association is responsible for maintaining; and
7. to disclose all material facts and circumstances affecting the financial condition of the association, including the interest of the developer and the developer's affiliates in any contract, lease, or other agreement entered into by the association.

The Future of Reserves in Idaho

Although Idaho has not made a ruling similar to some of its neighbors, we can anticipate Idaho courts may reconsider that position in the future. If it does, it is safe to assume that the Court will look to restatements, like the one the Utah Supreme Court relied on, and the way other states' courts have handled the issue. Developers in Idaho can anticipate potential legal updates by conducting a reserve study and creating an appropriate reserve fund. Beyond staying legally compliant, HOA reserve funds will help our Idaho neighborhoods remain safe, comfortable, and thriving communities.

HOAs and HOA reserves are complex matters. If you have additional questions, reach out to our Idaho offices at 208.473.7009 (Boise) or 208.215.2411 (Coeur d’Alene).