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Finances - Financial Affairs
BUDGETS, FINANCES AND REPORTS
Reserve Study
Cal. Civil Code
§ 1365.5. Fiscal duties of board of directors;
Signatures required for withdrawal of money; Reserve accounts
(a) Unless the governing documents impose more
stringent standards, the board of directors of the association
shall do all of the following:
(1) Review a current reconciliation of the association's
operating accounts on at least a quarterly basis.
(2) Review a current reconciliation of the association's
reserve accounts on at least a quarterly basis.
(3) Review, on at least a quarterly basis, the
current year's actual reserve revenues and expenses compared
to the current year's budget.
(4) Review the latest account statements prepared
by the financial institutions where the association has its
operating and reserve accounts.
(5) Review an income and expense statement for
the association's operating and reserve accounts on at least
a quarterly basis.
(b) The signatures of at least two persons,
who shall be members of the association's board of directors,
or one officer who is not a member of the board of directors
and a member of the board of directors, shall be required
for the withdrawal of moneys from the association's reserve
accounts.
(c)(1) The board of directors shall not expend
funds designated as reserve funds for any purpose other than
the repair, restoration, replacement, or maintenance of, or
litigation involving the repair, restoration, replacement,
or maintenance of, major components which the association
is obligated to repair, restore, replace, or maintain and
for which the reserve fund was established.
(2) However, the board 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
or other expenses, provided the board has made a written finding,
recorded in the board's minutes, explaining the reasons that
the transfer is needed, and describing when and how the money
will be repaid to the reserve fund. The transferred funds
shall be restored to the reserve fund within one year of the
date of the initial transfer, except that the board may, upon
making a finding supported by documentation that a temporary
delay would be in the best interests of the common interest
development, temporarily delay the restoration. The board
shall exercise prudent fiscal management in maintaining the
integrity of the reserve account, and shall, if necessary,
levy a special assessment to recover the full amount of the
expended funds within the time limits required by this section.
This special assessment is subject to the limitation imposed
by Section 1366. The board may, at its discretion, extend
the date the payment on the special assessment is due. Any
extension shall not prevent the board from pursuing any legal
remedy to enforce the collection of an unpaid special assessment.
(d) When the decision is made to use reserve
funds or to temporarily transfer money from the reserve fund
to pay for litigation, the association shall notify the members
of the association of that decision in the next available
mailing to all members pursuant to Section 5016 of the Corporations
Code, and of the availability of an accounting of those expenses.
Unless the governing documents impose more stringent standards,
the association shall make an accounting of expenses related
to the litigation on at least a quarterly basis. The accounting
shall be made available for inspection by members of the association
at the association's office.
(e) At least once every three years the board
of directors shall cause to be conducted a reasonably competent
and diligent visual inspection of the accessible areas of
the major components which the association is obligated to
repair, replace, restore, or maintain as part of a study of
the reserve account requirements of the common interest development
if the current replacement value of the major components is
equal to or greater than one-half of the gross budget of the
association which excludes the association's reserve account
for that period. The board shall review this study annually
and shall consider and implement necessary adjustments to
the board's analysis of the reserve account requirements as
a result of that review.
The study required by this subdivision shall
at a minimum include:
(1) Identification of the major components which
the association is obligated to repair, replace, restore,
or maintain which, as of the date of the study, have a remaining
useful life of less than 30 years.
(2) Identification of the probable remaining
useful life of the components identified in paragraph (1)
as of the date of the study.
(3) An estimate of the cost of repair, replacement,
restoration, or maintenance of the components identified in
paragraph (1) during and at the end of their useful life.
(4) An estimate of the total annual contribution
necessary to defray the cost to repair, replace, restore,
or maintain the components identified in paragraph (1) during
and at the end of their useful life, after subtracting total
reserve funds as of the date of the study.
(f) As used in this section, "reserve accounts"
means both of the following:
(1) Moneys that the association's board of directors
has identified for use to defray the future repair or replacement
of, or additions to, those major components which the association
is obligated to maintain.
(2) The funds received and not yet expended
or disposed from either a compensatory damage award or settlement
to an association from any person or entity for injuries to
property, real or personal, arising from any construction
or design defects. These funds shall be separately itemized
from funds described in paragraph (1).
(g) As used in this section, "reserve account
requirements" means the estimated funds which the association's
board of directors has determined are required to be available
at a specified point in time to repair, replace, or restore
those major components which the association is obligated
to maintain.
(h) This section does not apply to an association
that does not have a "common area" as defined in Section 1351.
Added Stats 1986 ch 294 § 1. Amended Stats 1991
ch 355 § 1 (AB 871); Stats 1992 ch 866 § 1 (AB 2693).
Amended Stats 1994 ch 885 § 1 (AB 2770); Stats
1995 ch 13 § 1 (AB 463); Stats 1996 ch 80 § 1 (AB 3015); Stats
1999 ch 898 § 2 (AB 1048).
ANNOTATIONS
Amendments:
1991 Amendment:
(1) Added subds (c), (d), and (f); (2) redesignated
former subds (c) and (d) to be subds (e) and (g); and (3)
deleted "from its annual budget" after "has identified" in
subd (e).
1992 Amendment:
Amended subd (d)(4) by substituting (1) "the
components identified in paragraph (1)" for "each major component"
after "restore, or maintain"; and (2) "their" for "its" after
"the end of".
1994 Amendment:
(1) Redesignated former subd (c) to be subd
(c)(1); (2) added subdivision designation (c)(2); (3) added
", provided the board has made a written finding, recorded
in the board's minutes, explaining the reasons that the transfer
is needed, and describing when and how the money will be repaid
to the reserve fund" in the first sentence of subd (c)(2);
(4) amended the second sentence of subd (c)(2) by (a) substituting
"one year" for "three years"; (b) adding "temporary"; (c)
adding "temporarily"; and (d) deleting "until the time which
the board reasonably determines to be necessary; (5) added
", unless the special assessment is to pay for legal costs
associated with litigation involving the repair, restoration,
replacement, or maintenance of, major components which the
association is obligated to repair, restore, replace, or maintain"
in the fourth sentence of subd (c)(2); (6) added the fifth
and sixth sentences of subd (c)(2); (7) added subd (d); and
(8) redesignated former subds (e)-(g) to be subds (f)-(h).
1995 Amendment:
Deleted ", unless the special assessment is
to pay for legal costs associated with litigation involving
the repair, restoration, replacement, or maintenance of, major
components which the association is obligated to repair, restore,
replace, or maintain" at the end of the fourth sentence of
subd (c)(2).
1996 Amendment:
Substituted (1) "maintaining the integrity of"
for "delaying restoration of these funds and in restoring
the expended funds to " in the third sentence of subd (c)(2);
and (2) substituted the first sentence of subd (e) for the
former first sentence which read: "At least once every three
years the board of directors shall cause a study of the reserve
account requirements of the common interest development to
be conducted if the current replacement value of the major
components which the association is obligated to repair, replace,
restore, or maintain is equal to or greater than one-half
of the gross budget of the association for any fiscal year".
1999 Amendment:
Amended subd (f) by adding (1) "both of the
following:" at the end of the introductory clause; (2) subdivision
designation (f)(1); and (3) subd (f)(2).
Collateral References:
Cal Forms Pl & Practice (Matthew Bender)
ch 124 "Condominiums and Other Common Interest Developments"
Miller & Starr, Cal Real Estate 2d § 20:39
Law Review Articles:
1988 legislative summary. 7 Cal Real Prop J
No. 1 p 1
Symposium: common interest development communities:
Part III: critical assessment: the financial role of community
associations. 38 Santa Clara LR 1135
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