Indiana HOA Reserve Fund Requirements: How to Avoid a $75,000 Special Assessment

It’s the meeting every volunteer HOA board member dreads.

The treasurer, looking pale, clears their throat and announces that the quote for repaving the community’s 20-year-old roads has arrived. The total is $75,000. A stunned silence falls over the room, broken only when someone asks the inevitable question: "How much do we have in the bank?"

The answer: $10,000.

This Indianapolis-area scenario is not hypothetical. It happens every day. The board, which has dutifully managed a budget for lawn care and insurance, has suddenly hit a financial wall. They now face a single, terrible option: levying a massive special assessment. To cover the $65,000 shortfall, every one of the 100 homeowners in the community will have to write a check for $650, due immediately.

The anger, accusations, and "for sale" signs that follow are predictable. This financial crisis, however, was not an emergency. It was a failure of planning. It was the result of confusing the operating budget with the reserve fund.

The Two-Budget Problem: Operating vs. Reserves

For an HOA board, effective financial management requires two distinct and equally important budgets. Most boards only master the first one.

• The Operating Budget: This is your day-to-day checkbook. It covers all the predictable, recurring expenses you pay monthly or annually. This includes things like landscaping, utilities for common areas, pool maintenance, insurance premiums, and property management fees. They are the costs of running the community.
• The Reserve Fund: This is your long-term capital budget. It is a separate savings account earmarked for the major repair and replacement of the community's assets. These are items that have a long but finite useful life. Think of roofs on the clubhouse, pavement, fences, boilers, or siding.

The problem is that a road that lasts 20 years doesn't send you a bill for 1/20th of its value every year. It sends one giant bill, two decades after it was installed. The reserve fund is the professional way to set aside that 1/20th (or 1/30th for a roof, or 1/15th for a fence) every single year.

It’s not "if" these items will fail. It’s "when." The operating budget pays for today. The reserve fund pays for tomorrow.

What Indiana Law Actually Says About Reserve Funds

When a board gets blindsided by a major expense, the first question they ask is, "Weren't we legally required to save for this?" In Indiana, the answer is complicated and depends entirely on your community type.

This legal distinction is the source of a massive, and often expensive, misunderstanding.

For Condominium Associations: The law is clear. Indiana Code § 32-25-4-4 explicitly requires a condominium association to "include the establishment and maintenance of a replacement reserve fund" in its budget. The law states this fund is for "capital expenditures and replacement and repair of the common areas" and cannot be used for "usual and ordinary repair expenses." For condos, this is not optional.

For Single-Family Homeowners Associations (HOAs): The law is different. There is no state statute in Indiana that forces a planned community HOA to conduct a reserve study or to fund a reserve account.

This legal loophole is large enough to drive a paving truck through. It gives many volunteer boards a false sense of security. They believe that because the law doesn't force them to save, they are not obligated to.

They are wrong. The most important law isn't on the books of the Indiana General Assembly. It's a legal concept called "fiduciary duty."

The Law That Truly Matters: Your Fiduciary Duty

As a board member, you have a fiduciary duty to act in the best interests of the entire association. This is your highest and most important responsibility. This duty is generally understood to have three parts: the duty of care, the duty of loyalty, and the duty to act within your authority.

Ignoring your community's long-term assets is a clear violation of the duty of care.

The duty of care requires you to make informed, reasonable, and prudent decisions, just as any ordinary person would in managing their own assets. Let's apply this to the $75,000 paving problem.

• An uninformed board "guesses" how much to save. They might throw $1,000 a year into savings and hope for the best.
• An informed board commissions a professional reserve study to find out exactly what they own, how long it will last, and what it will cost to replace.

When that $75,000 bill arrives, the first board is facing a lawsuit for negligence. The second board is executing a long-term plan. The "Business Judgment Rule," which protects board members from personal liability for their decisions, only applies if those decisions were informed and made in good faith. Guessing is not good faith.

Your primary job as a board member is to preserve, protect, and maintain the community's assets. Letting those assets decay without a plan to pay for their eventual replacement is a failure of that core duty.

The Hidden Requirement: Why Lenders May Force Your Hand

Even if a board is willing to risk a lawsuit over its fiduciary duty, there is a more immediate and powerful force at play: the mortgage market.

You may not have heard of Fannie Mae's lending requirements, but they have heard of you. For a bank to issue a mortgage that can be sold to Fannie Mae (which is most mortgages), the condominium or HOA must be deemed "warrantable."

One of those requirements is a review of the association's financial health.

Lenders and underwriters are looking for red flags, and the biggest red flag of all is an underfunded reserve account. As a general rule, many lenders want to see that the association is allocating at least 10% of its total budget to the reserve fund.

If your Indianapolis HOA is not doing this, it can be flagged as a risky project. The consequences are immediate and disastrous:

• Homeowners in your community may be unable to refinance their mortgages.
• Potential buyers may be denied a loan to purchase a home in your community.

Suddenly, the board's failure to plan is not a "future" problem. It is an immediate crisis that can lower property values for every single resident and trap current owners in their homes.

The Solution: The Reserve Study

You cannot fix a problem you cannot measure. The only way to stop guessing and start planning is to commission a professional reserve study.

A reserve study is not a simple audit. It is a comprehensive financial and engineering report prepared by a specialist. This document serves as the backbone of your community's long-term financial plan. It consists of two key parts.

1. The Physical Analysis: The consultant will walk your entire property and create a complete inventory of all common assets. This includes roofs, roads, sidewalks, pools, fences, lighting, HVAC systems, and more. For each item, they will assess its current condition, determine its "useful life," and estimate its "remaining useful life."
2. The Financial Analysis: The study will then calculate the future replacement cost for every single item and create a funding plan. This plan will show you exactly how much money you should be setting aside each month or each year to ensure the funds are available when the bill comes due.

This document is your roadmap. It is your defense against liability. It is the professional, responsible tool that shifts the conversation from "How could this happen?" to "We have a plan for this."

From Crisis to Control: The Simple Math of Planning

Let's return to our 100-home community with the $75,000 paving bill. The failure to plan created a financial and political crisis.

Scenario A: The Special Assessment (The Nightmare)

• Amount Needed: $65,000
• Number of Homes: 100
• Cost per Home: $650, due in 30 days.
• The Result: Homeowner anger, financial hardship, board member recall petitions, and a community in chaos.

Now, let's see what would have happened if a board had ordered a reserve study 20 years ago when the community was built.

Scenario B: The Reserve Fund (The Plan)

• Paving Cost: $75,000
• Useful Life: 20 years
• Cost per Year: $3,750
• Cost per Year per Home: $37.50
• Cost per Month per Home: $3.13

Which community would you rather live in? Which board would you rather be on?

For the price of a cup of coffee each month, the board could have avoided the single worst crisis in its history. That is the difference between professional management and amateur guesswork.

A reserve fund is not a "savings account." It is not "extra" money. It is an expense. It is the non-cash expense of your community's assets deteriorating day by day. You are simply choosing to account for that expense monthly, in small, manageable bites, rather than all at once in a single, devastating payment.

Good bookkeeping isn't just about paying the lawn care bill. It's about securing the financial future of the entire community. Stop guessing. Protect your community, protect your board members, and make a plan.