Properly managing reserve funds is one of the most important – and most misunderstood – responsibilities of a North Carolina homeowners' association (“HOA”) or condominium owners' association (“COA”) (collectively, “Community Associations”).
While North Carolina law does not set a specific dollar amount Community Associations must hold in reserves, it does require boards to plan for and budget “adequate” reserves. Understanding those expectations, and how to meet them, helps Community Associations fulfill their responsibilities appropriately, protect association assets, avoid special assessments, and demonstrate sound governance.
What Are Reserve Funds?
Community Association reserve funds are monies set aside for the repair, replacement, or restoration of shared assets and common elements – such as roofs, roads, siding, elevators, pools, and mechanical systems. These are long-term, infrequent costs that are distinct from a Community Association's operating expenses for day-to-day items like landscaping, utilities, or insurance. An association's governing document often defines which expenses are treated as Association reserve items versus operating expenses and may set the scope and permissible uses of Association reserve funds. A well-funded reserve will serve to reduce the need for emergency special assessments or borrowing when major repairs arise.
North Carolina's Legal Framework
North Carolina law requires both HOA and COA boards to plan for reserves as part of the annual budget process. For planned communities, N.C. Gen. Stat. § 47F‑3‑114 requires the HOA board to adopt a proposed annual budget that includes “adequate reserves for maintenance, repair, and replacement of common elements and for meeting the association's other obligations.” For condominiums, N.C. Gen. Stat. § 47C‑3‑114 imposes the same budgeting obligation for COAs.
The statutes do not define “adequate,” which means the Community Association board must make a reasonable, good‑faith determination based on factors like the age and condition of the community's assets and anticipated future costs. Failing to plan meaningfully for reserves can lead to deferred maintenance, reduced property values, and potential claims that the Board of Directors did not meet its fiduciary duties on behalf of the Community Association. It is also important to check the Community Association's governing documents, as such documents may include a minimum amount that must be held in reserve.
Reserve Studies: Not Required, But Helpful
A reserve study is a long-range capital plan for Community Associations. It lists the community's major common elements, estimates their remaining useful life and replacement costs, and recommends how much the HOA or COA should contribute to reserves each year.
North Carolina law does not require reserve studies for HOAs or COAs, but they are widely regarded as best practice. Best practice is to update a study every three (3) to five (5) years and use it to guide the annual budget. Even without a legal mandate, a reserve study gives the Board of Directors a clear, data driven basis for deciding what “adequate” reserves are for the community or condominium. Again, make sure to check the governing documents of the HOA or COA, as there may be a requirement that the Community Association conduct a reserve study on a specific timeline.
Why Community Association Reserves Matter
Community Associations that underfund reserves often face sudden, large special assessments when roofs fail or roads deteriorate. These assessments can strain owners, increase delinquencies, trigger disputes, and hurt marketability. By contrast, Community Associations that plan and fund reserves in advance protect Association amenities, keep the community attractive, and reduce the risk of unplanned or emergency assessments.
Practical Tips for North Carolina Community Associations
Start by adopting written financial policies that clearly explain how reserve contributions are calculated, how reserves are invested, and when they may be used. Keep reserve funds in a separate, dedicated account to avoid commingling with operating funds. Commission a reserve study and refresh it every three to five years – or sooner if inflation, construction pricing, or asset conditions change – so contributions stay aligned with real costs. As part of the annual budget process, record in the board minutes the rationale for reserve levels and expenditures to demonstrate a thoughtful, good faith approach under North Carolina law.
Bottom Line
North Carolina gives HOAs and COAs flexibility, but that flexibility comes with responsibility. Community Association Boards of Directors should use reasonable projections, maintain transparency with owners, and include adequate reserves in the annual budget to preserve common property and protect owners' investments. Resist the temptation to reduce current assessments at the risk of unscheduled future special assessments. Whether through a formal reserve study or a well‑supported internal review, proactive planning is both a legal expectation and a hallmark of a well‑run Community Association.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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