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Reserve studies used as basis for special assessments might be unreliable

March 08, 2009|Stephen Glassman and Donie Vanitzian

Question: Our monthly fees have quadrupled since 2003, and each year owners see yet another five-digit special assessment per unit.

Despite not using the money it has already collected, the board complains it does not have enough cash to operate our association. To substantiate its many special assessments, the board refers to reserve studies -- each claiming a different percentage of funding criteria. The latest board push is for yet another special assessment based on several reserve studies by companies that did not visit our facilities.

At the rate our association is hemorrhaging cash, it will be the year 2017 before we're anywhere close to a so-called 20% reserve funding. If component replacement is needed, we will be subject to yet bigger special assessments. No one warned me of these problems before my purchase. Can you provide some guidance on this?

Answer: Potential buyers and owners of deed-restricted property must diligently plan for yearly association-related increases that can occur. In meeting their obligations, associations may have to collect more money to keep pace with rising costs.

It is up to potential buyers and owners to make inquiries before purchasing in a common-interest development and it is up to titleholders to rein in cost-oblivious boards.

There are no laws requiring reserves, let alone a 20% reserve funding. Reserve account moneys are earmarked for the repair and replacement of association major property assets. Such accounts are not slush funds for indiscriminate spending or to make up operating fund shortfalls.

Budget planning and preparation is a major part of the board's fiduciary duty, functioning as a warning system to titleholders of what to expect in the coming year. As there is no law stating that an association's projected, or pro forma, budgets be accurate to the last cent, boards must truthfully and in good faith reasonably estimate line-item expenses as realistically as possible.

Where special assessments may be necessary in the coming year, the board is obligated to include a statement to that effect in the pro forma budget.

Regarding procedures for boards wanting to generate their own reserve studies without using outside companies, look generally at California Civil Code sections 1365, 1365.2, 1365.2.5 and 1365.5. These sections also address how to determine reserve account amounts including requisite disclosures and methods used for reserve calculations.

Reserve studies are merely projections. They take into account the estimated useful life and replacement costs of components, both of which may or may not change over time. Any report or study prepared by a third-party vendor that is generated without visiting the association's grounds at the time of writing the report is only a guess and should not be relied upon.

Relying solely on statistics ignores the possibility that some components may cost less at time of replacement while others may cost more or may not have to be replaced.

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

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