Effective July 1, of this year, California homeowner associations (HOAs) will be subject to new requirements, regarding the manner in which they must report the status of reserve accounts to their members. These changes in the law result from the passage of AB 2718 (Laird), a bill sponsored by the California Association of Realtors® (CAR), which was passed in August and approved by the Governor in September of 2004.

According to the Assembly bill analysis, "insurance providers report between 14 and 20 percent of lawsuits against Board of Directors are for financial mismanagement and of these, the number one issue is lack of reserve funds." Moreover, it noted that the Department of Real Estate reported that agents "cite litigation as the number one threat to future viability and market competitiveness of CIDs [common interest developments, such as condominium complexes]."

The office of the bill's author took note of the fact that "a common problem real estate agents encounter when selling a CID home is lack of information regarding the future assessments new members will encounter once they are in the association." Unfortunately, that scenario is a familiar one. A person closes escrow on a condominium, only to find out a few months later that there is going to be a substantial assessment in order to make up for an under-funded reserve account.

Even though HOAs already had the obligation to apprise their members of the status of their reserve accounts, the bill's proponents found that reserve studies were often complex, and next to impossible to understand. The purpose of the bill was to require, "homeowner associations to provide their members a user-friendly summary statement, which will clarify current and future assessments, the current amount of reserve funds, and future assessments that would be required for repairs and replacements that are the financial responsibility of the homeowners association."

The bill sets out a specific form (at §1365.2.5 of the Civil Code) for providing HOA members (and prospective buyers) information about the reserve account. It shows the current assessment per unit (and for each specific unit, if assessments vary according to unit size) as well as providing the same information for assessments not yet imposed, but scheduled by the board. The form also addresses whether or not the currently projected account balances will suffice for projected repair and replacement of major components over the next 30 years. If current projections are not sufficient, it must be shown what additional assessments will be needed. Also, if any major components are not included in the current reserve study, the form requires those components be identified, their estimated useful life be stated, and an explanation provided as to why they are not included.

The form, the "Assessment and Reserve Funding Disclosure Summary" is to accompany the pro forma operating budget that is required to be distributed to members each year.

The civil code sections covering the operation of HOAs provides that a board of directors may authorize the temporary transfer of money from a reserve fund to the association's general operating fund to meet short-term cash flow requirements. AB 2718 requires that such fund transfers must be described to members in a notice of intent prior to the board meeting. Such notice shall include the reason for the transfer, the options for repayment to the reserve fund, and whether a special assessment may be needed. Transferred funds are to be restored to the reserve account within one year, unless a temporary delay, supported by documentation, can be shown to be in the association's interest.

Assessing and collecting reserve funds for repairs or replacements that may not be needed until 10 years or more down the road is not one of the more enjoyable or popular tasks that comes with being an HOA director. But it is certainly one of the most important ones. More important even than listening to complaints about noise, decorations, or parking violations.

Published: March 15, 2005

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Bob Hunt is a former director of the National Association of Realtors and is author of the recently published book, "Real Estate the Ethical Way." A graduate of Princeton with a master's degree from UCLA in philosophy, Hunt has served as a U.S. Marine, Realtor association president in South Orange County, and director of the California Association of Realtors, and is an award-winning Realtor. Contact Bob at .