Reader Questions – Are Our Reserves Being Handled Properly?
May 31, 2020
Mr. Richardson, hello:
Is there a formula for the reserve funds that are necessary, or at least advisable, for a HOA? Also, can an assessment be collected from each homeowner and put in reserve and then returned to them after a reasonable time if it’s not needed?
Respectfully, B.K., San Diego
Dear B.K.:
HOAs in California are required by Civil Code Section 5550 to obtain a reserve study every three years and to review it annually. That reserve study informs the HOA as to how much money needs to be set aside each year to offset the ongoing deterioration of the common area elements included in the reserve study. There are many fine companies specializing in preparing reserve studies for HOAs. Without a good reserve study, the HOA has no roadmap for its financial security.
HOAs in California are required by Civil Code Section 5550 to obtain a reserve study every three years and to review it annually. That reserve study informs the HOA as to how much money needs to be set aside each year to offset the ongoing deterioration of the common area elements included in the reserve study. There are many fine companies specializing in preparing reserve studies for HOAs. Without a good reserve study, the HOA has no roadmap for its financial security.
As to assessing for money beyond that prescribed by the budget and reserve study, Civil Code Section 6600 requires that associations only assess for actual anticipated expenses. Assessing for a “rainy day fund” is not allowed.
Best regards, Kelly
Dear Kelly,
Our board has not raised assessments for four years. The reserve budget is less than 7%. If the board raised assessments as recommended by the reserve study and the management company, it ought to be higher this year. Can I pursue the board for failing in their fiduciary capacity?
E.Y., Pacoima
Dear E.Y.:
Budgets should follow the HOA’s projected actual expenses and the reserve fund contribution prescribed by the HOA’s reserve study. Budgets should reflect reality, not wishes. Some boards err by refusing to adopt realistic budgets which allow for the normal increases in expenses and set aside money to offset the ongoing deterioration of key HOA common area elements. However, suing the board is expensive and may not change anything. The ballot box in the HOA is usually far more powerful than the courts. So, elect a new board.
Sincerely, Kelly
Budgets should follow the HOA’s projected actual expenses and the reserve fund contribution prescribed by the HOA’s reserve study. Budgets should reflect reality, not wishes. Some boards err by refusing to adopt realistic budgets which allow for the normal increases in expenses and set aside money to offset the ongoing deterioration of key HOA common area elements. However, suing the board is expensive and may not change anything. The ballot box in the HOA is usually far more powerful than the courts. So, elect a new board.
Sincerely, Kelly
Dear Mr. Richardson:
Our HOA has a reserve line item for repair and replacement of the exterior surfaces of our condominiums. The original exterior has been replaced on approximately 50% of the units, but the reserves have been collected to pay for all of the units. Must all the units with the original exterior surfaces be updated since the useful life of this component has ended and the reserves have been collected for this component?
Thanks. D.B., Carlsbad
Dear D.B.:
Before the board began the wholesale replacement of the building exterior, hopefully it obtained expert inspection and advice about the condition of the exterior walls and the need to replace the exterior wallcovering material. It is certainly possible that the material is performing far better than predicted, but it is also possible that it is not, and that the layperson’s eye could be misled.
Before the board began the wholesale replacement of the building exterior, hopefully it obtained expert inspection and advice about the condition of the exterior walls and the need to replace the exterior wallcovering material. It is certainly possible that the material is performing far better than predicted, but it is also possible that it is not, and that the layperson’s eye could be misled.
The Business Judgment Rule requires, among other things, that the board of directors obtain the appropriate expert advice for each decision. A construction expert should be consulted prior to making major construction expenditures, to make sure the HOA is not repairing too much or too little.
If the appropriate expert says that, despite the reserve study predictions, a building component does not yet need replacement, the board may rely on that advice to defer replacement.
Thanks, Kelly
Written by Kelly G. Richardson
Kelly G. Richardson Esq., CCAL, is a Fellow of the College of Community Association Lawyers and a Partner of Richardson | Ober | DeNichilo LLP, a California law firm known for community association advice. Submit questions to [email protected]. Past columns at www.hoahomefront.com. All rights reserved®.
