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Reserve funds shouldn't be used for routine maintenance

A condo board that misuses funds might be liable for legal penalties.

July 12, 2009|Stephen Glassman and Donie Vanitzian

Question: I live in a California common-interest development of fewer than 50 condominiums. Our treasurer insists that money from the reserve fund that is used for replacing the decorative part of the roof, repairing the hot water system, etc., be replaced immediately after the funds are withdrawn.

He says that unless the projects are funded by imposing more assessments or borrowing until the reserve is equal to the recommendation of the reserve study, he will personally be subject to civil and possibly criminal penalties.

We go from one never-ending assessment to another while the reserve account deposits grow and grow to now several hundred thousand dollars. How do we owners stop this madness?

Answer: Stockpiling money in a reserve account is not necessarily smart or even the correct thing to do under the Davis-Stirling Act. Reserve accounts are not required by law, and the most popular reason to have one is to ensure that enough money is on hand to repair or replace major common-area components when needed.

A reserve study is merely the opinion of the study's author and an estimate of how much money might be needed.

Decorative items and the regular routine maintenance of major components should be part of the association's day-to-day operating budget, funded by regular monthly assessments. When a board uses money from its reserve account for regular maintenance, it is breaking the law, as reserve funds are collected and earmarked for a specific purpose.

Given your board director's remarks, it appears that he is misinterpreting the law and thereby misusing the reserve funds, exposing himself and the board to liability.

According to the Davis-Stirling Act, Civil Code section 1365.5, borrowing from the reserve account requires adherence to strict procedures. As a general rule, associations are forbidden from using reserve funds for anything but the "repair, restoration, replacement, or maintenance of . . . major components" or litigation involving such projects.

Money may be borrowed from the reserve fund "to meet short-term cash flow requirements or other expenses, if the board has provided notice of the intent to consider the transfer in a notice of meeting."

That section also requires that the notice "include the reasons the transfer is needed, some of the options for repayment and whether a special assessment may be considered." Then, if the board approves the transfer, it "shall issue a written finding, recorded in the board's minutes, explaining the reasons that the transfer is needed, and describing when and how the moneys will be repaid to the reserve fund."

Replacing the moneys borrowed can be spread out over one year, but the real issue is why the money is being used for day-to-day maintenance: Is it because not enough was budgeted and collected to cover those expenses? Or because the board insists on borrowing the money for uses otherwise not permitted?

Failure to follow the law is what may ultimately result in legal penalties, and individual board members may be held liable for their actions.

Maintenance of the common areas and all major items entails careful estimates and prudent management and is the association's obligation through use of its operating funds, not reserves.

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Send questions to Box 11843, Marina del Rey, CA 90295 or e-mail noexit@mindspring .com.

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