Editor’s note: this series of questions and answers are being provided to you in an effort to show that ‘we are not alone” and that many of the problems we face in our own backyard’s are the same as in other parts of the state or country.

HOA boards can borrow from community reserves

Question: I serve on my community association's board of directors. We have a shortfall in our operating account. What are the required procedures for “borrowing” from the reserves, and when must the reserve accounts be repaid?

Answer: Civil Code Section 1365.5, part of the Davis-Stirling Common Interest Development Act, provides that reserve funds may only be used for the repair, replacement and maintenance of the major components for which the association is responsible and for which the funds were set aside, but goes on to permit boards of directors to authorize the “temporary transfer“ of reserve funds to the association's operating account “to meet short-term cash flow requirements or other expenses.”

The statute sets out certain procedures that boards must follow before “borrowing” from the reserves. The board must have given notice of its intent to consider the transfer in the notice of the meeting that it is required to give the members by Civil Code Section 1363.05, the Common Interest Development Open Meeting Act. This notice must include the reasons why the transfer is needed, some of the options for repaying the money to the reserves and whether a special assessment may be considered.

If the board authorizes the transfer, the board must explain in the minutes of the meeting why the transfer is needed and describe when and how the money will be repaid to the reserve fund.

The statute requires that funds be repaid to the reserve accounts within one year, except that the board may decide to delay restoring the funds.

If the board is considering delaying the repayment, then it must give the same notice to the members required for considering the original transfer, and, at the meeting where the decision is made, make a finding, supported by documentation, that a temporary delay would be in the best interests of the association.

The statute directs boards to “exercise prudent fiscal management in maintaining the integrity of the reserve account.”

Margaret G. “Gen” Wangler is a senior shareholder with Fiore, Racobs & Powers.