Investing, Growing, and Withdrawing Reserve Funds

Investing, Growing, and Withdrawing Reserve Funds

Kelly, I am a member of my HOA board. Our prior management company had done all of our investments (from our direction) for our reserve funds. FDIC insured CD’s were used as we understood that they were required by California law only to invest our funds in FDIC insured funds. We saw that the interest rate income from FDIC insured funds did not cover inflation increases and considered utilizing a financial firm to assist us to find some other opportunities that better protected our reserve assets using a combination of FDIC and SIPC insured securities. We have had some questioning from homeowners if it legal for us to utilize an SIPC insured fund (versus an FDIC fund). What type of investment opportunities are legal for HOA reserve funds? Thank you, C.W., Oceanside Dear C.W., As a fiduciary of the association funds, the board must keep the members’ money secure and not subject to reduction. In the world of financial fiduciaries, if the fund shrinks, the fiduciary could be “surcharged,” meaning held personally liable for the reduction in the fund due to loss of funds. Loss of funds is not a risk with deposits in banking institutions insured by the Federal Deposit Insurance Corporation (FDIC), so long as no more than $250,000 is in any one institution. Many associations spread their reserve funds across multiple banks to keep their funds all insured within the limit. The Securities Investor Protection Corporation (SIPC, www.sipc.org) protects against a stock brokerage becoming insolvent or taking a client’s funds – but it expressly does not protect against declining investments. Associations are often tempted to place...
Ramped Up Assessments, Where To Pay

Ramped Up Assessments, Where To Pay

Mr. Richardson, This year our HOA dues increased 20%. The reason given was plumbing issues due to sewage backups. When I asked about just having a special assessment to cover the plumbing issues, I was told a special assessment would require a vote by association members. What can homeowners do to prevent this from continuing? J.L, Newport Beach Dear J.L., Most CC&R’s or bylaws limit increases in regular assessments by boards to no more than 20% per year. Per Civil Code 5605(b), governing documents cannot impose any smaller assessment limits to board power. Some boards, discouraged by lack of participation, address major expenditures by using the maximum increase in assessments for a few years, eliminating the need for a special assessment. While expedient, this does create a few issues. Since members are not voting on it, boards often skip the critical step of having “town hall” meetings and newsletter bulletins to inform the members the reasons for the expenditure. Also, once the need for the increase ends, will the board remember to reduce the assessment amount? Members really should be more involved in their associations, and it is discouraging for a board to try to have to avoid member votes simply because the members won’t vote. Thanks, Kelly Hello Kelly, Recently, I signed up for e-statements, by which my monthly statement is available online. I asked my HOA if I could still receive my monthly assessments through mail as well as being signed up for e-statements. Their reply to me was that I could only chose one way or the other. Is this allowed? J.K., Irvine Dear J.K., The Civil Code...
How Much Reserve Money Does Our HOA Need?

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...
HOA Annual Checkup – How Does Your HOA Score?

HOA Annual Checkup – How Does Your HOA Score?

Common interest developments, or homeowner associations (aka “HOAs”) house about one third of Californians, and most new housing stock is established in HOAs. Can buyers determine whether an association residence is a good investment, or if the HOA is healthy? Is it simply price and “location, location, location”? Well-run associations in poor locations might be more desirable than poorly run associations in great locations. Consider these factors: Maintenance Is the property well-maintained? Peeling paint, cracked stucco, dead landscaping, and worn hallway carpets are not good signs. Some associations pinch pennies, avoiding normal maintenance expenses in order to avoid increasing assessments – never a good idea. Board Meetings HOA boards must by law meet at least quarterly, and most boards in all but the smallest associations meet at least monthly. Boards that meet little or not at all may be conducting business informally or even in secret. Boards meeting too often may be disorganized. Ask for a few months’ minutes – See what you can learn about the board’s operation. Board minutes must by law be made available to members, and can be very informative. Look for minutes reflecting businesslike meetings and an association making progress. Association Financial Stability – Reserves HOAs are required to provide detailed reserve funding disclosures, so read them! Normal residential appraisals do not address capital reserve funding (or the lack thereof). Short-sighted HOAs avoid accumulating reserve fund savings (in order to avoid assessment increases), but that is actually a form of growing indebtedness. Some day that association will need to take out a loan or impose a special assessment because it is not ready for...

HOA Project, Old Spa

Kelly, Our board hired a landscape architect to give a proposal on redoing our entrance area. The proposal includes replacing original asphalt with pavers and installing or extending planters plus redoing all the plants. The cost will be over $90,000. I told our board that according to our CC&R’s it takes a majority vote by the membership if any new project exceeds 5% of our operating budget (budget is $255,000). I was told that the law firm we have on a retainer said this would not be considered a new project. I asked for a copy of the lawyer’s letter and they denied my request. Can the board legally deny me from seeing the lawyer’s opinion? Our board is thinking about awarding the contract for doing the work without a membership vote. Thanking you in advance, B.B., Huntington Beach Dear. B.B., Many HOAs have CC&Rs which ban boards from authorizing “capital improvement” projects costing more than 5% of the annual budget, unless there is a membership approval vote. The question here is not the expense amount, but whether it is “capital” or replacement. I assume your HOA’s lawyer decided it was an upgrade, not a capital improvement. The HOA can indeed keep the attorney letter confidential. However, if the opinion guides and benefits the entire community and if there is no harm in doing so, a board might choose to disclose it. How is the HOA funding this expense? There might be a membership vote on the special assessment that could be necessary to fund the work. It is a good idea to hold “town hall” meetings to discuss...