HOA Insolvent? A Board Changing Assessment Allocations

assessments cc&rs h o a homefront hoa homefront Aug 07, 2022

By Kelly G. Richardson, Esq.

Dear Kelly,

Our HOA has suspended reserve deposits, borrowed from reserves without disclosing to members the full borrowed amount or the repayment plan, and not repaid borrowed funds within the required one year (also without disclosure to homeowners). Even before these actions, the reserve was "materially underfunded" according to the latest reserve studies. Obviously, the red flags are waving wildly, but our board is unwilling to address, or even openly discuss, these financial issues. 

I've tried to work with the board, but my concerns are brushed off. Aside from running for a board position, is there anything a homeowner can do? I have considered sending an email to all homeowners, raising my concerns and imploring other homeowners to request and review financial reports for themselves. However, this will definitely create neighborhood drama, anger board members, and I worry it could lead to litigation against the HOA, which would hurt everyone in the long run. I don't want blame, lawsuits, or anger; I just want accurate financial reports, transparency about the problems, and a plan to get our community back on solid financial ground. Any advice? L.A., Bonsall

Dear L.A.:

The HOA boards have some strong financial oversight responsibility. See Civil Code Sections 5500 and 5502, which place some strong responsibilities on HOA boards to monthly review a list of financial reports and to scrutinize larger HOA expenditures. Associations are not required by statute to deposit money in the reserve account, but are required to make very detailed disclosures to members (and, by extension, prospective purchasers) regarding the state of the HOA’s reserve savings. 

HOAs who are trying to “hold the line” on assessments often do so by halting regular deposits to reserves and instead use that money to help pay ongoing expenses. That creates two problems for the HOA. First, it hides the fact that the budget is inadequate and is not meeting the HOA’s monthly expenses. Second, such an HOA is falling into an unliquidated debt situation. Each month various common area components are deteriorating, and the function of the capital reserve fund is to offset that ongoing deterioration with corresponding savings so the HOA is ready when the component needs replacement or refurbishment.

L.A., lawsuits are not the answer to help HOAs begin doing this properly. Elect directors who will commit to following the law and to make (and not avoid) the hard financial decisions necessary to take care of the HOA community. 

Best, Kelly

Dear Mr. Richardson: We pay monthly dues, which are based on one or two bathrooms. Can the board of Directors now change to dues formula to all the same amount of fees charged each month? Can you advise? P.M., Orange

Dear P.M.:

The HOA CC&Rs should describe how the budget is allocated amongst the members in the form of annual or monthly assessments. There are many possible ways to allocate assessments and no method is perfect. Normally a board cannot change that, and a membership vote is necessary. However, trying to get members to change that allocation may be a fruitless effort, no matter how logical the proposed modification. It’s highly unlikely to get a majority to agree that some owners will pay more and allow others to pay less than their current obligation.

Sincerely, Kelly


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