Q: Our HOA reserves for replacement are severely underfunded. Does California law require that HOAs undertake a third-party analysis of future replacement costs, and, if so, at what intervals? Is there a standard in California law or practice for a minimum percentage of projected reserves? Florida has recently booked state law, or so I understand, requiring HOAs to maintain reserve funds meeting 100% of future replacement costs. Do you expect California to adopt a similar law, and, if so, sooner or later? — C.F., Corona Del Mar
Q: Our HOA stated they need a large sum from each resident to pay for the remaining roofs that are coming to the end of their useful life. They’re saying it may be an emergency assessment. I think the emergency is that they depleted the reserves and now have no money to take care of expenses and issues that should’ve been taken care of prior. This HOA and management company are not into preventive maintenance but into reactive maintenance. All I want to know is what happened to our reserves. Does the law require a certain amount of money in reserves at all times and would this be classified as an “emergency assessment.” — M.L., Rancho Bernardo
A: Civil Code Section 5550 requires California HOAs to conduct a visual inspection and a study of the major components that the HOA repairs, replaces, or maintains and to develop an estimate of the remaining useful life and the cost of replacing them. This must be performed at least every three years and be reviewed by the board annually.
The law doesn’t specifically require HOAs to follow the reserve study recommendations, but Civil Code 5560, 5565, and 5570 require extensive disclosures to the members and prospective purchasers about the HOA’s level of compliance with the reserve study recommendations.
The statute requiring reserve studies does not require that they be performed by an independent third party, but most HOAs do not have a volunteer in-house with the expertise to assess the condition of the common area components and estimate their future replacement costs.
Even if the HOA did have qualified volunteers, why would they take on the potential liability for that work? So, HOAs normally hire companies with the demonstrated expertise to prepare reserve studies. The Community Associations Institute (CAI) has a “Reserve Specialist” designation and has published significant reserve study standards. Make sure your reserve study vendor is qualified – that study relates directly to your HOA’s financial health.
HOAs failing to set aside money to offset the ongoing deterioration of major common area elements quietly fall into insolvency – a subtle but significant insolvency that will be revealed when the major replacement expense is imminent and the HOA does not have the funds to pay for it. Then, the HOA must declare an emergency assessment, seek member approval for a special assessment, or seek a major bank loan.
I don’t think a 100% reserve funding requirement is necessary for California HOAs. Florida’s new requirement in that regard applies to condominium buildings of three stories or more in height, and clearly arises from the terrible Surfside disaster in 2021.
Coming up: Part 2 on reserves will be next week’s column.
Kelly G. Richardson CCAL is a member of the College of Community Association Lawyers and Partner of Richardson Ober LLP, a California law firm known for community association advice. Send questions to Kelly@roattorneys.com.
Kelly Richardson, Esq. is a fellow of the College of Community Association Lawyers and partner of Richardson Ober LLP, a California law firm known for community association advice. Submit column questions to kelly@roattorneys.com.
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