Borrowing from HOA Reserve Funds: State-by-State Rules and Regulations

Homeowners associations (HOAs) are tasked with managing the financial health of their communities, including maintaining a reserve fund for future capital expenditures. However, the question of whether an HOA can borrow from those reserve funds for other uses — such as covering operating shortfalls — is governed by a patchwork of state laws and community governing documents. This article provides an overview of how different U.S. states regulate such borrowing practices.

Understanding Reserve Funds

Reserve funds are typically set aside to cover major repairs and replacements (e.g., roofing, road resurfacing, pool systems) anticipated over the life of a property. These funds ensure financial stability and help avoid large special assessments. Borrowing from reserve funds generally refers to temporarily using money earmarked for future capital needs to cover short-term deficits or emergencies in the operating budget.

States That Prohibit or Strictly Limit Borrowing

California

California has one of the most comprehensive statutory schemes for HOAs under the Davis-Stirling Act. HOAs are permitted to borrow from reserve funds only in cases of a "temporary shortfall." However, Civil Code §5515 requires:

• The board to adopt a written repayment plan.

• Repayment to the reserve fund within 1 year (unless extended for good cause).

• Disclosure to members in the next budget or financial report.

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Florida

Condominiums: Chapter 718

Florida Statute §718.112(2)(f) allows reserve funds only for the specific purposes for which they were established—like roof replacement, paving, structural integrity, etc.

• Under §718.112(2)(f)(h), if the board wants to use any reserve funds for other purposes, they must obtain advance approval by a majority vote of unit owners at a duly called meeting.

  
  

• As of December 31, 2024, amendments tighten those rules: funds tied to items covered in a Structural Integrity Reserve Study (SIRS) cannot be diverted, even with member vote.

  
  

So, Florida condominium boards cannot unilaterally borrow or spend reserve funds for anything other than their intended uses.

HOAs: Chapter 720

Under Florida Statute §720.303(6)(d), HOAs may not use reserve funds for any purpose other than the specified reserve item unless:

• The board obtains affirmative approval from a majority of voting members.

This effectively prohibits unauthorized or internal borrowing without community consent.

Nevada

NRS 116.3115 allows reserve fund usage only for the repair, replacement, and restoration of common elements — not for operational expenses. There is no provision for internal borrowing, making it effectively prohibited.

States That Permit Borrowing with Conditions

Arizona

While Arizona law (A.R.S. §33-1806.01) mandates reserve studies and prudent financial management, it does not explicitly prohibit borrowing from reserves. It’s generally allowed if:

• Disclosed transparently to members.

• Done with a clear, written repayment plan.

Most HOAs rely on internal policy and governing documents for guidance.

Texas

Texas law is generally silent on HOA reserve management. However, HOAs governed under §209 (for residential subdivisions) can often borrow from reserves if:

• Permitted by governing documents.

• Approved by a vote of the board or members, depending on bylaws.

Best practice in Texas includes clear disclosures and detailed tracking of borrowed/reserved funds.

States with No Specific Prohibition or Requirement

In many states — such as Georgia, North Carolina, Michigan, and Illinois — state statutes are either silent or provide minimal guidance. In these cases, borrowing from reserve funds is typically governed by:

• The HOA’s declaration (CC&Rs),

• Bylaws,

• Board policies.

Key risks in these states include fiduciary liability, member lawsuits, or audits if borrowing lacks transparency or justification.

Best Practices Regardless of State

Regardless of legal requirements, HOAs should follow these best practices when borrowing from reserve funds:

1. Document the Purpose: Explain why borrowing is necessary and ensure it’s not routine.

2. Create a Repayment Plan: Include clear dates, amounts, and interest (if applicable).

3. Board Resolution: Have the board formally approve the borrowing and repayment terms.

4. Member Notification: Disclose borrowing in annual budgets and reserve study updates.

5. Audit Trail: Maintain detailed records for all withdrawals and repayments.

Conclusion

Whether an HOA can borrow from reserve funds depends on a mix of state laws and internal governance rules. States like California and Florida impose strict controls, while others leave the matter to the discretion of the HOA board and community documents. Regardless of location, transparency, planning, and accountability are crucial to protect reserve funds — and community trust.

For HOA boards or managers considering borrowing from reserves, consulting with legal counsel and conducting a reserve study are essential first steps.