Special Assessements-When Reserve Shortfalls Are Manufactured

Mike Kosor
Sep 18
5 min read

By Mike Kosor, Founder of NVHOAReform

This blog explains how some HOA boards create artificial “reserve crises” by quietly misusing reserve funds — and how those decisions can leave homeowners blindsided by sudden, massive special assessments.

The Manufactured Crisis No One Talks About

It usually starts quietly.

Assessments are low. The board says costs are under control. No one sees any warning signs.

Then, seemingly out of nowhere, an email lands in your inbox: the HOA is imposing a huge special assessment because the reserve fund is “dangerously underfunded.”

It sounds like an unavoidable emergency. But often, it isn’t.

Too many boards take a shortcut — quietly dipping into the reserve fund to cover routine operating costs. And when the reserves run low, they hit owners with a massive assessment to refill the account.

This isn’t just poor planning.

It’s often a manufactured shortfall — and it undermines the protections built into the law.

What Reserves Are (and Aren’t)

The reserve fund exists for one purpose: to repair, replace, and restore the “major components of the common elements” — like roofs, streets, plumbing systems, elevators, or pools. It also extends to “any other portion” of the association the board is obligated to maintain, repair, replace or restore.

Reserve funds are not for operating costs — utilities, management fees, landscaping, or routine maintenance. Those must be funded from the operating budget.

Associations must under the law (NRS 116.3115):

conduct a reserve study at least once every 5 years, and
review it annually and make adjustments “necessary to provide adequate funding”.

Owners must be given the current reserve estimate and a general statement describing how reserves were established each year.

Tip: Read the budget and descriptions each year. Most owners do not.

How Boards Manufacture Reserve Shortfalls

Here’s the pattern seen in many associations:

The board keeps regular assessments artificially low to avoid political backlash.
When operating costs exceed budget, they “borrow” from the reserve fund to cover the shortfall.
Over time, the reserve balance collapses below what’s needed to maintain the property.
The board then declares the reserves “underfunded” and imposes a sudden special assessment to replenish them.

The “shortfall” isn’t caused by worn-out roofs or failing pavement.

It’s caused by years of quietly raiding reserves to pay operating bills.

Why It Conflicts with Nevada Law

Several provisions of Chapter 116 make this practice improper:

Operating expenses must be covered by the operating budget, which owners can reject.
Reserve funds must be preserved for their designated purpose.
Using reserves to plug operating gaps bypasses owner oversight and undermines the statutory budget process.

It can even amount to a breach of fiduciary duty if directors knowingly misuse restricted funds.

The “Appropriate Level”?

This is not a simply question.

Nevada law requires every HOA to conduct a reserve study every five years and review it annually — but never defines what counts as “adequate” or “fully funded.”

There’s no statutory percentage, no minimum balance, and no penalty for ignoring the study’s recommendations. Boards are only required to set whatever contributions they “believe” are appropriate — a standard that gives enormous discretion with almost no accountability.

A board can keep contributions artificially low for years, diverting money to cover operating gaps. Then, when reserves inevitably fall short, it declares a crisis — claiming it has “no choice” but to levy a special assessment.

On paper, this looks like responsible action. In reality, it may reflect years of avoidable underfunding.

Because the law gives no hard benchmark, owners can’t easily see — much less prove — mismanagement until the damage is done.

To be clear, simply setting 100% as the standard is arguably not the right answer. But what should be an actionable standard is open-ended (which NVHOAReform has asked to be closed) and contributes to manufactured shortfalls.

The reserve study is meant to be a planning tool.

But when boards treat it as optional, it becomes a shield for poor budgeting rather than a guardrail against it.

Where the Manager Fits In

The law places a clear duty on the community manager to help keep boards from making these mistakes (NRS 116A.630). They must:

comply with all applicable federal, state and local laws and regulations, and the governing documents of each association
ensure financial transactions are current, accurate and properly documented,
prepare interim and annual financial statements, and
maintain internal accounting controls, including segregation of incompatible accounting functions- among other things.

So if a board starts paying operating bills from reserves or fails to fund reserves adequately, the manager is not supposed to look away.

Their job is to warn the board and push it to correct course or get professional guidance.

Failing to do so is not just sloppy — it can be treated as a breach of the manager’s own statutory duties.

Not Always Malice — Sometimes Just Bad or Lazy Budgeting

It’s important to distinguish misuse from mismanagement.

Most boards don’t intentionally raid reserves — they simply do a poor job of budgeting and end up short of operating funds.

That can happen when boards:

do not understand Reserves
underestimate vendor cost increases, inflation, or routine maintenance needs,
fail to update their reserve study annually or use outdated assumptions,
avoid raising dues to stay politically popular, or
ignore small recurring repairs until they snowball into large capital expenses.

This kind of negligence may not technically violate the statutes — but it still harms owners.

And if it leads to sudden special assessments, it shows the board has failed its duty of care to plan prudently.

Tip: If you only attend one baord meeting all year, attend the one adopting the budget. Ask for the draft budget once on the agenda and besure you get a copy before the meeting. Your board may pushback asserting it is draft and not releasable. WRONG. Once on the agenda owners are entitled to a copy before the meeting. Lastly, if the manger is doing all the talking and appearng to know far more than the directors about the budget- warning- get involved

Tip: Boards can — but rarely do — adopt mid-year budget adjustments. Doing so requires repeating the entire budget process: proper notice and owner ratification. But it avoids surprises.

How to Spot Reserve Fund Misuse

Ask these questions whenever your board claims the reserves are “underfunded”:

Has the board used reserve funds to pay operating expenses like utilities, landscaping, or management fees?
Have reserve contributions stayed flat for years despite rising costs or inflation?
Has the board skipped or delayed reserve studies (required at least every 5 years)?
Has the board ignored or failed to review the study’s recommended contributions?
Is the board proposing a large special assessment without showing how the amount ties back to the reserve study?

If any answer is “yes” or “unclear,” owners should demand a transparent accounting before paying.

The Bottom Line

Reserve shortfalls don’t just happen — they are often manufactured through years of quiet mismanagement.

Nevada law gives boards the tools to plan honestly:

set accurate budgets,
fully fund reserves over time, and
obtain owner ratification when increases are needed.

But boards that treat reserves like a slush fund only delay the pain — and make it worse when it comes.

Owners have the right to insist their boards budget honestly and govern transparently — before being handed the bill for someone else’s shortcuts.

SHCA Deserves Its Freedom