Can we spend reserve funds on insurance? – Daily news

Question: Last year, after insurance skyrocketed, the HOA board took a loan from the reserves and then returned the reserves with an assessment. We then learned that the board borrows money from reserves every year to pay for insurance and then pays it back over time, without notifying residents.

It is my understanding that annual insurance payments should be part of the operating budget. Is it legal for the board of directors to borrow from reserves each year to pay the annual insurance premium? I understood that borrowing from reserves to pay operating budget items should be reserved for emergencies. – JR, Santa Monica

Answer: Civil Code Section 5510(b) prohibits HOA boards from spending reserve money except to repair, restore, replace, or maintain components included in the reserve account designated for financing. However, Civil Code 5515 allows short-term borrowing provided that the board of directors approves the borrowing in a public meeting with notice of the agenda. So, your homeowners need to know when the board is borrowing from reserves. Many of my HOA clients have recently taken out loans from reserves or undergone emergency assessments to cope with the huge increase in property insurance. However, if this happens every year, the budget may be too tight because the board is trying too hard to keep dues low.

Question: Our HOA replacement reserves are seriously underfunded. The Board recognizes this shortfall and is working to address it, but it will take time to reach appropriate levels of reserve funding. Does California law require an HOA to conduct 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 forecast reserves? – CF, Corona Del Mar

Response: California reserve laws require detailed disclosure to members and potential purchasers of the HOA’s allocation of funds to compensate for impairment, but do not require any specific percentage or share of funding. Pursuant to Civil Code Section 5550, HOAs must obtain a reserve study every three years, review it annually, and develop a long-term financing plan to meet the HOA’s reserve fund accumulation needs.

The reserves study should estimate the remaining useful life of the components included in the study. FannieMae and the FHA require condominium associations to set aside 10% of their budget each year in reserves to approve a condominium project in order to qualify for a loan. I’m increasingly hearing stories from homeowners and property managers about lenders turning away homebuyers in HOAs because they haven’t saved enough money in a reserve fund.

Question: My HOA wants to charge home sellers $2,000 to fund reserves. Can they just change the rules or do they need to change the CC&Rs? – J.M., Palm Desert.

Issue: Civil Code 4575 states that an HOA may not charge a transfer fee other than to cover the actual costs of amending its records and providing disclosure documents. I recently heard that some HOAs charge transfer fees, but I highly doubt they would stand up to a legal challenge. Before the board supports this idea, you should ask the HOA attorney about such a fee.

Kelly J. Richardson CCAL is a Fellow of the College of Community Association Lawyers and a partner at Richardson Ober LLP, a California law firm known for its community association counsel. Send questions for the column to [email protected].