Many associations have alarmingly low reserves, which prompted the legislature to increase reserve disclosures and funding plans to avoid budget-busting special assessments.

Boards are now required to make the following reserve disclosures:

1. Deficiencies. Disclose any deficiencies in the reserves expressed on a per unit basis. Civil Code §1365(a)(2)(D)

2. Deferrals. Disclose whether the board plans to defer repairs or replacement of any major component, including a justification for the deferral. Civil Code §1365(a)(3)(A)

3. Loans. Disclose whether the association has any outstanding loans with an original term of more than one year, including the payee, interest rate, amount outstanding, annual payment, and when the loan is scheduled to be retired. Civil Code §1365(a)(3)(D)

4. Funding Plan. Prepare and distribute a funding plan that indicates how the board plans to fund the annual contribution to meet the association's obligation for the repair and replacement of all major components. The reserve funding plan must be adopted in an open meeting. Civil Code §1365.5(e)(5) Beginning January 1, 2009, boards must distribute their reserve funding plan to all members along with the association's annual operating budget, not less than 30 nor more than 90 days before the start of the association's fiscal year. Civil Code §1365(b)

5. Assessments. If the board determines an assessment increase is required to fund the reserves, the assessment must be adopted in an open meeting and separately from the adoption of the funding plan. Civil Code §1365.5(e)(5)

6. Form of Disclosures. Prepare and distribute specific reserve funding disclosures that comply with Civil Code §1365.2.5 The form has changed significantly and boards must comply with the new format.

Disclosure Window. The disclosure must be done not less than 30 days nor more than 90 days prior to the beginning of the association's fiscal year. This is an improvement over the old requirement that had a 15-day window for making the disclosure. For other disclosures, see disclosure checklist.

Reasonable Fee. Associations may charge a reasonable fee for copies of the reserve report. Boards may also make documents available in electronic form.

RECOMMENDATION. Boards should not attempt to create their own reserve studies nor should they assign the task to the association's management company, unless the company is qualified to prepare reserve plans. Because of the rising potential liability from improperly funded reserves and inadequate notices, boards should use professional reserve companies for their studies. There are many such companies to choose from and boards should build the cost into their annual budget.

Updated by ADAMS KESSLER 6/30/2008