Sunday, October 09, 2011

Homeowner associations are not required to create reserve accounts

By Stephen Glassman and Donie Vanitzian
October 9, 2011

Republished with permission from Copyright Holders

QUESTION: Is there anything in the Davis-Stirling statute that requires minimum reserve funding and a professional reserve study?

ANSWER: There is no requirement in the Davis-Stirling Act (DSA) (Civil Code sections 1350 to 1378) that associations create or maintain reserve accounts in any amount. The DSA does require that associations with existing reserve accounts, regardless of the amount, provide titleholders with all of the information detailed in Civil Code section 1365.
The DSA also does not require a professional reserve study. Many so-called reserve study businesses work to persuade associations that they must maintain a specified dollar amount in their existing reserve accounts, but unless an association has them or wants to create them, they are not required.

Associations that want to start a reserve account and continue to fund it will find in the DSA the necessary notices that must be given to titleholders and the methods for determining what is to be reported to owners in terms of collections and payments. These standards should be read in their entirety and fully understood before creating any reserve account or reserve funding mechanism.

Regardless of whether a reserve account is created, the board still has a duty to conduct frequent, diligent visual inspections and determine the current estimated replacement cost, estimated remaining life and estimated useful life of each major component. If the association intends to fund those repairs with special assessments as the need arises, it must annually circulate a notice informing all titleholders of the method the association will use to fund such repairs.

Check to see whether your association's covenants, conditions and restrictions require a reserve account. If so, follow the law as set forth in the DSA. Although some association boards may look on reserve funds as their own petty cash or slush fund, this is not the purpose of a reserve fund.

Reserve funds are not recoverable when an owner sells a home or loses it to foreclosure. If the funds are not used during the owner's time at that association, the money paid into the reserve by the owner becomes a nonrefundable gift of the owner's cash to the association and is not tax-deductible.

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