California is poised to pass a law that could lead to higher homeowners association fees. Critics are concerned it could lead to HOAs hiking costs on homeowners, but supporters say it’ll actually help them in the long run.

Assembly Bill 2050, which passed the state Legislature early this month, would require HOAs to keep a 30-year reserve fund. Starting in 2032, if an association’s reserves would run out of money at any point in that period, the HOA would have to put at least 15% of its annual budget toward the reserve until its projections are in the black. If the budget isn’t big enough to cover the mandated transfer, AB 2050 would require the HOA to raise dues on homeowners via a “special assessment.”

Gov. Gavin Newsom has until Sept. 30 to sign or veto the bill.

Nearly a quarter of Californian households pay association dues, according to U.S. Census Bureau data. Those monthly fees, which cover shared amenities and repairs to common spaces, can range from a few hundred dollars to as much as four figures a month, and have risen in recent years along with the costs of insurance and maintenance.

Condos have been hit especially hard. Last year, government-sponsored corporation Fannie Mae started putting some buildings on a “blacklist” for having insufficient reserves or maintenance issues. Many lenders refuse to touch those condos, forcing buyers to pay in cash. That uncertainty, along with rising monthly dues and high mortgage rates, have made condos less of an affordable option for first-time buyers even though condo prices have fallen.

By requiring HOAs to build their reserves, AB 2050 would ensure associations are better prepared to pay for building upkeep or other costs, said Robert DeNichilo, legislative co-chair at the Community Associations Institute’s California Legislative Action Committee. Over time, he argued, the legislation would help reduce a “tsunami of special assessments.”

“No one wants to pay more than they have to … but the reality is those bills aren’t going away,” said DeNichilo, whose organization spearheaded AB 2050. “This is budgeting the actual cost of ownership.”

It’s unclear how much AB 2050 itself would increase monthly costs for homeowners. HOAs can increase regular dues by up to 20% per fiscal year, and levy temporary special assessments totaling 5% of the expense budget, without calling a vote from their members.

The Consumer Federation of California, which opposed the bill, said it would allow HOAs to raise dues on homeowners with little oversight. Robert Herrell, the group’s executive director, argued a more comprehensive policy would have also capped fee increases.

“We’re not against reserving, but it ought to be combined with some reasonable limitations on what could be increased and how rapidly, along with some important guardrails on financial protection and responsibility so the residents don’t get ripped off because the board acts like a kangaroo court,” Herrell said.

The Consumer Federation supported a separate bill that would have capped annual increases of regular assessments at 8%, unless approved by a quorum of homeowners, but it stalled in the Legislature.

Research by Nathan Godin, a doctoral student at the UC Berkeley Haas School of Business, found that a 2022 Florida law mandating reserve funding for condo buildings caused HOA fees to rise as associations spent more on maintenance. Prices for those buildings also declined.

But Godin said that many of those Florida associations hadn’t conducted a reserves analysis for decades, whereas California requires its HOAs to do a review every three years, though it doesn’t currently mandate reserves be funded by a specific amount. That likely increases the chance California’s HOAs have already built future maintenance costs into their dues.

Herrell argued that many HOAs have simply failed to pay attention to their reserves, setting many communities up for big jumps in fees.

“I don’t know that you want to sign a bill that’s essentially going to directly lead to massive assessment increases on 14 million Californians,” he said.

Condo associations are facing other sources of pressure to build their reserves, Godin said. Fannie Mae’s lending standards will require condo associations to put 15% of their annual budgets toward reserves starting next year, up from the current 10%. Buyers of homes in condo buildings that don’t meet the corporation’s standards can struggle to find a mortgage.

Besides aligning state law with those lending standards, AB 2050 could also have the benefit of making HOA fee increases more fair to future homeowners, Godin said.

“You don’t want to be basically passing the buck on to future owners,” he explained. “You want to have this month-to-month payment instead of expecting some future special assessment. It’s just better practice.”

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This article originally published at California is set to pass a law that could trigger massive wave of HOA fee hikes.