Reader Questions - Reservations Regarding Reserve FundsNov 21, 2016
Is there a formula to help determine what is a reasonable amount to hold in reserves for a homeowners association?’
J.L., Los Angeles
There are many statutory requirements regarding reserves, including Civil Code Sections 5550 (reserve study every three years), 5550(a) (annual review of the reserve study), 5560 (a reserve funding plan), 5300(2)(b) (annual distribution of summary of the association’s reserves), 5500 (board quarterly review of reserve accounts and expenditures), and 5570 (detailed annual reserve disclosure).
However, no law requires that associations actually put any money in the reserve fund. FannieMae and FHA require condominium projects set aside at least 10% of their budget for reserve contributions, in order to be eligible for their financing.
The California Association of Realtors® has been helpful in promoting legislation in recent years requiring more reserve fund disclosures. However, it is impossible to come up with an appropriate minimum funding level for all associations. So, homebuyers and HOA members must increasingly recognize the critical importance of well-funded reserve accounts.
HOAs, including yours, should create a plan to reach full compliance with its reserve study recommendations.
I am a new board member on a well-run condo association. We have several hundred thousand dollars in reserves in FDIC insured CD’s, receiving a very small interest rate. I believe the funds (or at least a part of them) should be invested in an insurance company fund that has paid more interest in recent years. This investment is not insured and so the other board members voted to have the funds stay in the CDs. Is this the normal way of handling reserves? If not, could the board be accused of not acting responsibly in the investments?
C.K., West Covina
The association reserve funds should be deposited in a bank account insured by FDIC. Your board acts a fiduciary with respect to those funds, and could held personally liable if the funds are invested and any funds are lost. If your HOA’s account holds over $250,000 (the current FDIC limit), talk to your banker about getting the money protected by having it in multiple accounts.
Dear Mr. Richardson,
In an article you spoke of a reserve summary that needs to be on file. We just had a reserve study completed on our small complex. Your article made it appear that much more than that study is necessary to comply with the law. Is that correct?
It does seem that the laws makes the position of HOA board member HOA an almost impossible one to fill, especially in a small association. Can you comment on that also?
The law requires very detailed written disclosures to the membership and prospective purchasers, as referenced in my response to J.L. above.
For the very small association, bluntly, the Davis-Stirling Act largely does not work. It is too complicated and in many respects unrealistic for very small associations. For example, three unit associations must vote by secret ballot, using inspectors of election, because the law applies to all associations alike. Homebuyers should not expect that very small HOAs will be fully compliant with the Davis-Stirling law, because for the most part they are unaware of its complex requirements.
Thanks for your questions,
Written by Kelly G. Richardson
Kelly G. Richardson Esq., CCAL, is a Fellow of the College of Community Association Lawyers and a Partner of Richardson | Ober | DeNichilo LLP, a California law firm known for community association advice. Submit questions to [email protected]. Past columns at www.hoahomefront.com. All rights reserved®.