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Is Your HOA Handling The Reserve Funds Correctly?

Few disputes between homeowners and HOA boards are more controversional than special monthly fee assessments applied toward a community project, particularly when the reserve fund to handle unexpected costs has been mishandled. Under provisions of the new Davis-Sterling Act, HOA Boards in California must meet certain requirements regarding their reserve funds.

This blog post will discuss what some of those rules are.

What is the reserve account for if you get hit with an assessment anyway?

The reserve account is a required component of every HOA budget. The Board must identify and fund (through the annual budget) a special account used specifically to meet or help defray the expected future repair and replacement costs of community property necessary for the upkeep of the property or building. In short, the fund can only be used to cover the cost of any property the HOA is obligated to construct, install, repair or maintain. Any other use of the account is illegal and may subject the Board to civil action by the homeowners affected.

Is your board meeting its legal responsibilities?

The first question a homeowner has the right to ask is whether the HOA or Condo Association Board is meeting it's strict requirements about reserve funds under California law.

Unless the HOA governing rules impose more strict standards, the Board is compelled by the Davis-Stirling Act to follow these regulations:

  1. Review the HOA's operating and reserve accounts and expenditures quarterly and reconcile them with the annual budget
  2. Review the financial account statements issued by the bank(s) in which the operating account and reserve accounts are maintained. Reconcile the bank statements with the Boards bookkeeping account statements.
  3. Make income and expense reports availabe to HOA members at least quarterly

Your first question about a special assessment: Why?

Every HOA annual budget will set aside a portion of the monthly association fees to stock the reserve account. If your Board has put a special assessment on the agenda, it is fair to ask why it is necessary and whether reserve funds can be used to cover the full cost of the project, without dipping below the mandatory minimum fund balance required for your assocation. 

When reviewing the long-range operating budget for special projects to be funded by the reserve account, determine whether repairs, replacement or special projects may have been added without full disclosure to the HOA members.

The Board has an attorney. Homeonwers may need one, too.

You also have the right to ask to see records proving that the Board has met it's legal obligation for due diligence over the fund balance. If expenditures have been higher than the amount budgeted, it is fair to have an experienced attorney investigate more thoroughly, to determine whether malfeasance or misconduct may be a reason.   

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