Question: Our homeowner association’s president explained to our board how the budget process actually works. She said: “You start by working out how much you can get out of the homeowners, then you go to the Budget and Reserve Study to figure out how to get that result. The reserve study company will work with us by doing a couple of go-arounds to get us to the result we want.” Am I being naive to think the job of a reserve study company is to come up with realistic numbers, instead of numbers that fit the board’s agenda?
Answer: In addition to statutory duties of the board described in Civil Code section 5550, directors have a duty to act in good faith and in the best interests of the association’s titleholders. Reserve bank accounts are not intended to be slush funds for a board’s personal agendas or spending pleasures, although that is often what happens. Money that funds a so-called reserve account originates from the efforts of hard-working owners with a vested interest in their property, and they expect boards to act appropriately.
When unscrupulous board directors and/or their advisors conspire to collect more money for any reason other than for the purpose of a necessary and express and earmarked repair or maintenance, that could be deemed a fraud perpetrated upon the owners at best, and theft at worst. Contriving such a report constitutes intent on the part of the board to deceive those who are responsible for funding the reserve bank account.
The board doesn’t need to hire a company to produce a study it can do it itself, and if needed, members can appoint committees consisting of homeowners to assist with the task. Civil Code section 5570 sets forth the “Assessment and Reserve Funding Disclosure Summary Form” to be used at the fiscal year end. This statutory form was designed to make the board’s job easy and the study more cost-effective. In the vein of transparency, after completing the form, the board can circulate it to owners for comment.
Inspection of major components and reserve study minimum requirements are detailed in Civil Code section 5550, outlining what the report must contain, not what the board president would like it to say. A reserve study is supposed to provide the owners who are asset holders in that development, and the association, with vital information regarding eventual capital repairs to common property.
These rules are meant to assist the board in determining what action the association needs to take to be able to fund needed repairs or replacement of common property. That determination is not complicated. It is typically accomplished by taking the useful life of a common property asset (often found in tables provided by the Internal Revenue Service), then figuring the remainder of its useful life (the number of years since the asset was last replaced or restored, subtracted from its useful life). Many times a mere visual inspection determines the status of property.
Nothing in this arena is certain. Companies that produce such studies do so as a guideline for associations to use as part of their planning deliberations and budget forecasting. Predicting the cost of any repair or replacement, or the end of its useful life, is merely a “guestimate.” It is only after the capital expenditure must actually take place that a dollar amount is obtained and a cost-per-owner can be determined.
When those costs are “doctored” or fabricated for the purpose of obtaining money from owners, the entire value of the reserve study is negated and the report is unreliable.
Boards are reminded that Civil Code section 5510(a) requires signatures of at least two directors for withdrawal of money from the association’s reserve accounts. This president’s approach to providing the information — getting what she wants rather than what is required by law — puts her in breach of her duty to the association and in violation of laws regarding disclosures to titleholders. If this type of conduct persists, owners will be spending far more than is required of them, and that extra money paid out is non-refundable.
Before purchase, diligent buyers will ferret out nuances in association-generated reports, budgets and minutes pertaining to “potential” and/or “completed” repairs. When necessary repairs aren’t made, sellers must disclose that fact to potential buyers, thus increasing the likelihood of a failed sale. This could necessitate the seller’s refunding money for those repairs to the buyer or risk being sued themselves.
Zachary Levine, partner at Wolk & Levine, a business and intellectual property law firm, co-wrote this column. Vanitzian is an arbitrator and mediator. Send questions to Donie Vanitzian JD, P.O. Box 10490, Marina del Rey, CA 90295 or email@example.com.