What Amount of Reserves Does the Law Require?

What Amount of Reserves Does the Law Require?

Dear Kelly, Is there any legal requirement for the reserves to be at any levels or is it a recommendation by the state? Can an HOA be taken over by the state if it is underfunded and if so, at what percentage? Thank you, S.P., Newport Beach Mr. Richardson, Please tell me if there is a Civil Code requiring a certain percentage of funds to be kept in the HOA reserve fund? Also, would you know if there is an average or median level that is known for California HOA’s.? Ours is over 100 percent. J.D., El Cajon Dear S.P. and J.D., The Davis-Stirling Act contains several requirements regarding reserves. Civil Code Section 5550 requires a full study be performed every three years, with annual reviews in-between. Civil 5550(b)(5) requires a long-term funding plan, and Civil 5560 requires that plan include scheduled assessment increases and be adopted in an open board meeting. Civil 5565 requires a detailed written disclosure of the status of each common area component in the reserve study, which disclosure must be in the form prescribed by Civil 5570. This disclosure, per Civil 5300(b)(2) is part of the Annual Budget Report, and so is distributed annually to members and to prospective buyers. Civil 5510(b) requires that reserve funds be spent only on the items they are reserved for, and per Civil 5515 any other withdrawal of reserve funds is considered borrowing which must be disclosed to the members per Civil 5520. The Davis-Stirling Act does not specify any minimum funding of reserve accounts and does not specify a percentage the fund must be in comparison to...
Make a Target! Goals for 2019

Make a Target! Goals for 2019

The late and legendary coach John Wooden said “The most important key to achieving great success is to decide upon your goal and launch, get started, take action, move.” Your association might benefit from setting a few goals, and then moving to achieve them. Here are some ideas for goals in the coming year: Increase the association’s reserve funds by 15%. The closer the association is to a fully funded reserve account, the more financially secure it is. Reduce assessment delinquencies by 20%. Make sure the association has all the Annual Budget Report (Civil 5300) and Annual Policy Statement (Civil 5310) items and annually provides them to owners. Improve member communication and save money by encouraging members to accept communications by email. The law now allows such a consent to be sent by electronic mail. Update the association CC&Rs and bylaws if they are the original documents or are at least 15 years old. Make sure the documents use the current Civil Code references which have been in effect since 2014. Updating the statutory references can be accomplished by board motion (in an open meeting) under Civil 4235. Review and update the rules. Remove rules discriminating against children or which are outdated and no longer enforced. Make sure the HOA has all the legally required rules. Hire an independent consultant to provide a comprehensive assessment of association maintenance and repair needs, to discover any overlooked problems before they become more expensive later. The consultant should NOT be a candidate for the work, so there is no mixed motive in their recommendations. Re-evaluate and update the association web site (or...

Myths Regarding the New Acts

The reorganized and relocated Davis Stirling Common Interest Development Act will become law on January 1, 2014 (Civil Code 4000-6150). On the same day, another California Law Revision Commission product, the Commercial and Industrial Common Interest Development Act (SB 752) also will become law (Civil Code 6500-6876). Some myths are already circulating about these Acts and, unfortunately, some of them are being circulated by lawyers. Myth #1 HOAs must immediately prepare completely new documents, the “Annual Budget Report (ABR)” and “Annual Policy Statement (APS)”. The new Act refers to the ABR and APS as new disclosures, which starting next year, HOAs must distribute annually to members. However, the ABR and APS are primarily collections of documents HOAs already distribute. One collection, the ABR, consists of items which likely change each year, while the APS collection consists of items which typically will not change much from one year to the next. If your HOA has not yet distributed its budget package from 2014, would it be a good idea to get a jump on things and prepare the ABR and APS this fall? Sure, but that is very different from saying it is required. Also, you don’t need a lawyer to prepare this! The competent manager should know how to prepare these two items for your association- and, since it is basically what your manager already is doing, it should not cost extra. Myth #2 HOAs must amend their governing documents to update all statutory references. I very recently learned of a lawyer who is saying that the relocation of the Davis Stirling Act “forces” HOAs to update statutory references...

Getting Ready for 2014

While January 2014 seems a long time away, now is the time for prudent boards, managers and attorneys to begin preparing for the reorganized and relocated Davis-Stirling Common Interest Development Act. A previous column (HOA Homefront #57), summarized the changes in the law. There are some things your HOA can do to be more ready. Begin collecting consents to receive notifications by e-mail. The new law will permit associations to give electronic notices to members who agree to accept such method of communication. In a large association the savings of cutting down on postage and paper could be very substantial, but even small associations will benefit. Encourage your members to sign an “opt in” notification. Your association can include it in the next assessment mailing, and have them available at the management office and at board meetings. Remind owners that this will not only save them space and clutter, but will help keep the budget (and therefore assessments) under control. Review your disciplinary hearing policies (or create some). The new law will require that when the association imposes a reimbursement claim against a member, that claim must be handled using the same process as for member discipline. The law currently does not provide much guidance to boards as to how to conduct these hearings, and unfortunately that is not going to change in the new year. In my experience, boards, having little guidance in the law about how to conduct these hearings, often take far too long. The increase in these hearings in the future means your HOA closed sessions are going to become much longer. Consider adopting policies...