A full pot of reserve cash would be nice but isn’t mandatory
Question: Our homeowners association’s president received a reserve fund study and, based on it, says that recent legislation mandates that ours be “fully funded.” He is asking for a vote on a special assessment to fully fund our reserve account.
The property manager is unaware of any new legislation and says that the study is simply a recommendation.
Has there been a change in the Davis-Stirling Act since June 2006 regarding reserve funds, and if so, must reserve accounts be fully funded?
Answer: Reserve reports and studies are only recommendations. There is no new legislation on this topic.
Before voting on this, the owners should demand the board substantiate its actions and the special assessment. Most guidelines for special assessments may be found in the association’s governing documents and throughout Civil Code Sections 1350 to 1378.
The Davis-Stirling Act does not require that a reserve account be established, but on Jan. 1, 2007, disclosures mandating distribution of an “Assessment and Reserve Funding Disclosure Summary Form” became required. This form is located in the Civil Code Section 1365.2.5.
It says, “The amount of reserves needed to be accumulated for a component at a given time shall be computed as the current cost of replacement or repair multiplied by the number of years the component has been in service divided by the useful life of the component. This shall not be construed to require the board to fund reserves in accordance with this calculation.”
That statutory disclosure does not mean the association must have or create a reserve account. Whether your association should have a reserve fund is a decision for the titleholders to make. If the owners in your association, as in many others in California, decide to forgo accumulating money in a reserve account and choose instead to assess for repairs as needed, that can be an equally prudent policy.
The term “fully funded” is an oxymoron because until the actual cost of the repair or replacement is known and takes place, “fully funded” can only be an estimate. The Davis-Stirling Act provides no legal definition for “fully funded” or a mandate to “fully fund” any reserve account.
Funding a reserve account means that money collected to repair or replace a major component be approximately the amount needed at the time the repair or replacement takes place. Such accounts are typically collected over the estimated useful life of the component. For example, if a roof is estimated to last 20 years and would cost $100,000 to replace at the end of that projected life span, the association might collect $5,000 per year for those 20 years.
Even though the law states that the board can’t spend funds designated as reserve funds for any purpose other than the repair for which the fund was established, there are no penalties if boards violate this law.
Boards “may authorize the temporary transfer of moneys from a reserve account to the association’s general operating fund to meet short-term cash flow requirements or other expenses, if the board has provided notice of the intent to consider the transfer in a notice of meeting,” according to Civil Code Section 1363.05.9.
Note that money collected by the association for deposit into a reserve account does not entitle the titleholder to a personal tax deduction. When the homeowner sells, the money cannot be reclaimed and, in essence, becomes a gift to the association.
There are arguments for and against reserve funds, and some covenants, conditions and restrictions require the association to establish a reserve account but others do not. In either case, accountability and the overseeing of reserve fund accounts are a topic of concern at many associations.
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Send questions to P.O. Box 11843, Marina del Rey, CA 90295, or e-mail noexit@mindspring.com.
