March 18, 2007

NEW RESERVE DISCLOSURES

QUESTION: Is there a required amount that must be set aside each year for reserves? Our treasurer wants to have 100%. Most of the members feel this is not necessary and prefer a special assessment when the time came, if we do not have enough reserves. Is there a suggested amount or percentage required at this time.

ANSWER. Your treasurer's concern is understandable. Many associations have alarmingly low reserves, which prompted the legislature this year to again increase reserve disclosures and funding plans to avoid "budget busting" special assessments.

New Disclosures. It appears the legislature wants 100% reserve funding and amended the Davis-Stirling Act so that boards are now required to make the following additional 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.

RECOMMENDATION. Boards should not attempt to create their own reserve studies nor should they assign the task to the association's management company. 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.

Sincerely yours,   Adrian J. Adams, Esq. Adams Kessler PLC