by Kelly G. Richardson, Esq. CCAL | Jun 10, 2019 | H.O.A. Homefront, Reader Questions
Dear Mr. Richardson, Our HOA has operating and reserve investment funds. The monthly assessments include amounts to increase the reserve account balances. Interest earned on the reserve account investments is transferred to operating income monthly rather than to increase the reserve account balance. I believe this treatment overstates income from operations and understates the reserves account balance. What do you think? I.L. Oceanside Dear I.L., Your association’s practice of transferring reserve account interest to the general account troubled me, but I am not an accountant. I checked with Tim Bradley CPA, an accountant known for working with HOAs. Mr. Bradley said the interest “was earned in the reserve fund and should be reflected there.” If the association is moving that interest to the operating account, he said it should then be reflected as an interfund transfer between the reserve fund to the operating fund, and included in the annual budget as an operating fund item (interest income-reserve transfer). He concluded by saying “the Board should inform the reserve study company of this transfer since reserve studies contemplate the retention of interest with reserves.” Based on Mr. Bradley’s comments, I checked with a leading reserve study expert, Robert Nordlund of Association Reserves Inc. He said, “but since the funding plan is all about preparing for costs in future years, it is prudent and common that the effects of interest and inflation are incorporated in Funding Plan calculations.” I.L., bluntly, your association should be setting its budget so that its regular assessments meet the anticipated expenses. Siphoning reserve income to subsidize the budget obscures the fact that the association budget is inadequate....
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by Kelly G. Richardson, Esq. CCAL | Jan 21, 2019 | Articles, H.O.A. Homefront
Before seeking a board seat, the best candidates should improve their readiness for service, and can: Read the governing documents at least once The governing documents are the framework (along with applicable laws) within which the board must operate. Familiarize yourself with these important documents. Most likely, the majority of the neighbors have not read them. Take particular care in reviewing the use restrictions in the CC&Rs, and carefully read all the HOA rules. One of the main tasks as a director is not only to enforce and implement those documents but also to educate and inform the neighbors, most of whom will not be familiar with the “do’s and don’ts.” Join CAI CAI is the only nationally respected resource for homeowners, promoting better community governance and prepared volunteers. Read CAI’s free introductory publications “Introduction to Community Association Living,” “From Good To Great,” and “Rights and Responsibilities for Better Association Communities,” available at www.caionline.org/homeownerleaders. Take advantage of CAI’s board training courses All CAI chapters offer free or low-cost courses training volunteers to better serve their communities, including a 3-hour “Basic Board Education” course, and the “Essentials of Community Leadership,” an all-day course. The Orange County Chapter offers its “Community Leadership Training Program.” Also offered annually is the California Law Course for CID Managers, an 8-hour course. The CAI headquarters also offers a four-hour interactive online seminar, called the “Board Leadership Development Workshop, accessed at www.caionline.org/bldw. Understand the business judgment rule The business judgment rule separates careful board members from liability for the decisions they make while governing the association. Learn the boundaries of that rule. Even well-intentioned directors can...
by Kelly G. Richardson, Esq. CCAL | Dec 3, 2018 | Articles, H.O.A. Homefront
Assembly Bill 2912 The most important new legislation changing how HOAs will operate is Assembly Bill 2912. AB 2912 began with the statement that its purpose is to “take important steps to protect [HOA members] from fraudulent activity by those entrusted with the management of the association’s finances.” Sponsored by the Community Associations Institute and the California Association of Community Managers, the bill received no credible opposition and passed both houses of the Legislature on unanimous votes. Civil Code 5380(b)(6) and 5502 One very significant change is the new Civil Code 5380(b)(6) and 5502. These new statutes are identical in substance and so appear to be redundant. They require that before any transfer of $10,000 or 5% of total association combined reserve and operating deposits (whichever is smaller), there must be prior written approval from the association board. This slows down the overly active board officer or lazy manager who would pay bills or transfer funds without bothering to obtain explicit board approval. One question is whether a manager could obtain permission in advance to pay certain larger recurring bills, but the intent of the statute seems to argue against this and require express permission for each individual transfer. Association boards should already be preparing for this additional step and talking to their managers about how compliance will occur. This statute does not only reference payments, but controls any “transfer” of association funds. So, advance written authorization is required not only for payments and withdrawals but also deposits and transfers between association accounts. Civil Code 5500 Civil Code 5500 has for years required boards to at least quarterly review...
by Kelly G. Richardson, Esq. CCAL | Nov 12, 2018 | H.O.A. Homefront, Reader Questions
Hello Mr. Richardson, Our board is against raising our fees which have been the same for at least 10 years! Obviously we are not keeping up with inflation. According to our reserve study we are over $1000 per unit underfunded. We have [decades old] buildings. My concerns are falling on deaf ears despite the encouragement of our management company to raise fees. I would deeply appreciate your opinion. J.E., Irvine Dear J.E., Association boards are responsible to budget and spend association funds wisely. If a board decides in advance that it will not increase the budget, it is quite likely such a board has placed as its first priority the artificial preservation of assessments and that the upkeep of the property (and the association’s long-term financial health) is a lower priority. Properly caring for the common property and keeping vendor expenses flat for over ten years is unbelievable (and not in a good way). Because of the fact of inflation, cost increases should be factored into the healthy HOA budget. Otherwise, the association is probably deferring maintenance, hiring cheap (instead of the most competent and appropriate) vendors, and is not properly funding its reserve account. Such association are not financially healthy and are akin to people who live on credit cards. Such an association eventually has to face a day of unhappy reckoning when the deferred bills all come due and the association is forced to borrow. Qualified and certified managers are trained to prepare budgets and should be heeded in this regard. Maintaining property, keeping up with inflation, and depositing faithfully in reserves are all actions preserving the...
by Kelly G. Richardson, Esq. CCAL | May 21, 2018 | H.O.A. Homefront, Reader Questions
Hello Kelly, I enjoy and learn from your column on HOA’s. I live in small resident-managed HOA. Our reserves are very low. Is there a minimum amount or percentage for reserves required by law? Also, is there a legal requirement for a regular audit? Is there a resource I can access for basic legal requirements for HOAs? My sense is we are not fully complying with regulations and laws. Thank you, F.S., Carlsbad Dear F.S., No, there is no specific minimum percentage or amount of money required to be in an association’s reserve account, and the law does not specifically require that ANY money must be in the account. Instead, the law focuses on disclosure, in the hope that savvy homebuyers will realize that purchasing a home in a poorly funded association is less desirable. Civil Code Sections 5550, 5560, 5565 and 5570 require, among other things, that all associations obtain a reserve study each three years, review it annually, and make extensive disclosures about the extent to which the HOA is accumulating the amounts of money recommended by the reserve study. Many boards feel they are helping the members by keeping monthly assessments lower and not building the association’s reserve account each month. This is not help, any more than it helps to borrow each month to pay one’s bills. Reserve accounts keep homeowner associations financially stable by accumulating money each month to roughly offset the ongoing deterioration of capital common assets – such as, for example, roofs, railings, decks, asphalt and other items which deteriorate with the passage of time. An association which does not faithfully build...
