Q: Last year after insurance skyrocketed, the HOA board borrowed from the reserves and then paid back the reserves with an assessment. We then learned that the board borrows from the reserves every year to pay the insurance and then pays it back over time, without notice to the residents.
My understanding is that annual insurance payments should be part of the operating budget. Is it legal for the board to borrow every year from the reserves to pay the annual insurance payment? I understood that borrowing from reserves to pay for items in the operating budget should be reserved for emergencies. – J.R., Santa Monica
A: Civil Code Section 5510(b) prohibits HOA boards from spending reserve money except for repair, restoration, replacement or maintenance of the components included in the reserve account is intended to fund. At the same time, Civil Code 5515 allows short-term borrowing, so long as the board approves the borrowing in an open meeting with agenda notice. So, your homeowners should know when the board is borrowing from reserves. Many of my HOA clients have recently borrowed from reserves or passed emergency assessments to handle the huge increases in property insurance. However, if this happens every year, maybe the budget is too thin because the board is trying too hard to keep assessments low.
Q: Our HOA reserves for replacement are severely underfunded. The board recognizes this deficit and is working to catch up but it will take time to achieve a suitable reserves funding level. Does California law require that HOAs undertake a third-party analysis of future replacement costs, and, if so, at what intervals? Is there a standard in California law or practice for a minimum percentage of projected reserves? – C.F., Corona Del Mar
A: California laws regarding reserves require extensive disclosures to members and prospective buyers regarding the HOA’s set-aside of funds to offset deterioration, but do not require any particular percentage or fraction of funding. Under Civil Code Section 5550, HOAs must obtain a reserve study every three years, review it annually, and develop a long-term funding plan to meet the HOA’s reserve fund accumulation needs.
The reserve study should estimate the remaining useful life of the components included in the study. FannieMae and FHA require that condominium associations set aside 10% of their budget in reserves annually to have a condo project approved for loans. I am increasingly hearing stories from homeowners and managers about HOA homebuyers being denied mortgage loans by lenders due to inadequate set-aside of money in the reserve fund.
Q: My HOA wants to charge $2,000 to sellers of homes to fund reserves. Can they just make a rule change, or do they need to change the CC&Rs? – J.M., Palm Desert.
Q: Civil Code 4575 says that HOAs cannot charge a transfer fee except to defray actual costs to change its records and provide disclosure documents. I have heard recently of some HOAs charging transfer fees, but I am quite doubtful that they would withstand legal challenge. The HOA’s counsel should be asked about such a fee before the board pursues the idea.
Kelly G. Richardson CCAL is a Fellow of the College of Community Association Lawyers and Partner of Richardson Ober LLP, a California law firm known for community association advice. Send column questions to Kelly@roattorneys.com.
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