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EXCESSIVE RESERVES
 QUESTION: Our reserve
account is currently funded at 1000%. Is this legal? Can we refund the money to owners? Thank you.
ANSWER:
There may be legitimate instances when reserve funding temporarily exceeds 100%. It is not illegal and a reasonable surplus creates a contingency for unexpected
expenses.
However, anything over 130% is generally
considered excessive. A 1000% surplus is not appropriate unless it is a
temporary condition resulting from an insurance or construction settlement. Even
then, the monies should be in an account separate from reserves and used for
those items for which the
settlement occurred.
Restoring Balance. Assuming the 1000% is
due to excessive reserve contributions rather than a one-time settlement, the
account should be brought back to normal funding levels. I do not recommend
writing checks to owners because it (i) creates disputes between current and
prior owners over who should receive the money, (ii) is an inappropriate use of
reserves funds
Civ.Code
1365.5(c)(1), and (iii) may create tax complications. The best way to
restore balance is to gradually deplete the surplus by reducing or temporarily stopping contributions to the reserve account.
BORROWING
FROM RESERVES
QUESTION: If an association borrows from
its reserves and doesn't pay the money within a year, what are the consequences?
 ANSWER: If
a board borrows from reserves, whether by making actual transfers from the account
or by not making budgeted contributions, the association must repay the funds within one year from the date of borrowing
but may delay repayment "upon making a finding supported by documentation that a
temporary delay would be in the best interests" of the association.
Civ.Code
1365.5(c)(2) Documentation may be supplied by a reserve study company.
Special Assessment. The statute also
requires that boards "shall exercise prudent fiscal management in maintaining
the integrity of the reserve account."
Civ.Code
1365.5(c)(2) Boards must levy special assessments to recover the full amount of the expended funds within
the required time limits. Special assessments are subject to the limitations imposed by
Civ.Code 1366
unless the expenditures were for emergencies as defined by
Civ.Code
1366(b).
Consequences. You asked about
consequences. If the board fails to repay the monies, there are no penalties. At
best, an owner could file suit and ask a judge to order the board to meet its obligations.
DEPLETING RESERVES
 QUESTION: Is a
board limited to spending
a certain percentage of the association's reserve fund in one fell swoop? Our board
recently used $60,000 from its reserves for one project, leaving only a few
thousand in the fund.
ANSWER:
Boards are not limited in how much they can spend from reserves. Reserves are accumulated for one reason, and
that is to be spent. Many associations have large reserve components such as roofing
or painting. As a result, the reserve fund will take a significant dip when these projects are
completed.
If the reserve fund becomes dangerously low after
a major project, it means that insufficient funds were accumulated
for other projects. This will result in deferred maintenance and/or special
assessments for those projects. If the board has properly built up reserve funds, then when the
time is right, the right thing to do is to spend the money.
Thank you to Robert Nordlund of
Association Reserves, www.ReserveStudy.com, for
his input.
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Sincerely
yours,
Adrian
J. Adams, Esq.
Adams Kessler PLC |
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