Reader Questions - How Much Reserve Money Does Our HOA Need?

Hello Kelly,

I enjoy and learn from your column on HOA’s. I live in small resident-managed HOA. Our reserves are very low. Is there a minimum amount or percentage for reserves required by law? Also, is there a legal requirement for a regular audit? Is there a resource I can access for basic legal requirements for HOAs? My sense is we are not fully complying with regulations and laws.

Thank you,

F.S., Carlsbad

Dear F.S.,

No, there is no specific minimum percentage or amount of money required to be in an association’s reserve account, and the law does not specifically require that ANY money must be in the account. Instead, the law focuses on disclosure, in the hope that savvy homebuyers will realize that purchasing a home in a poorly funded association is less desirable. Civil Code Sections 5550, 5560, 5565 and 5570 require, among other things, that all associations obtain a reserve study each three years, review it annually, and make extensive disclosures about the extent to which the HOA is accumulating the amounts of money recommended by the reserve study.

Many boards feel they are helping the members by keeping monthly assessments lower and not building the association’s reserve account each month. This is not help, any more than it helps to borrow each month to pay one’s bills.

Reserve accounts keep homeowner associations financially stable by accumulating money each month to roughly offset the ongoing deterioration of capital common assets – such as, for example, roofs, railings, decks, asphalt and other items which deteriorate with the passage of time. An association which does not faithfully build its reserve balance each month is falling into debt – but the truth is not revealed until the association needs a major refurbishment and the association discovers it is unable to pay for the necessary work. Associations in such a position have three choices (all of them bad): delay the work, ask the members to approve a major special assessment, or mortgage the association’s financial future by making a long-term loan with one of the banks serving HOAs (assuming the HOA qualifies).

Underfunded reserves have become such a problem that the California Bureau of Real Estate issued a Consumer Alert in September 2012 on the subject. Homes in underfunded associations, particularly condominiums, may have unintentionally misleading appraisals since appraisers are not required to examine the status of the association reserve account.

As to audits, California law does not require an association obtain regular audits. However, Civil Code 5305 requires that associations with at least $75,000 in annual income obtain a review of its financial statements annually by a licensed accountant.

California law is becoming more complex and burdensome on HOAs each year, and smaller HOAs are treated exactly the same as huge 3,000 home associations. Even very small associations these days need a professional credentialed association manager to help them. While they cannot give legal advice, good managers understand the annual disclosure and reporting requirements.

To read the Davis-Stirling Act yourself, there is only one official site – the one established and maintained by the California Legislature. Visit www.leginfo.legislature.ca.gov. Then click on the “California Law” tab, and then “Civil Code”. The Davis-Stirling Act starts at Section 4000.

Thanks for your question.

Sincerely,
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®.