What to know if you’re considering borrowing from reserves.

In California, Civil Code section 1365.5 makes it clear that a board may authorize a temporary transfer of money from a reserve account to an association’s general fund. However, such transfers are only allowed to meet short term cash flow requirements or other expenses.

borrowingIn the current economic climate, many homeowner’s associations are facing tough budget decisions as they are faced with an increasing number of members falling behind on assessment payments, while operating costs are rising.  In such circumstances, many boards are tempted to dip into reserves to meet their cash flow needs.

In California, Civil Code section 1365.5 makes it clear that a board may authorize a temporary transfer of money from a reserve account to an association’s general fund. However, such transfers are only allowed to meet short term cash flow requirements or other expenses. In addition, prior to the transfer the board must have provided notice to the members of the intent to consider the transfer in a notice of meeting stating why the transfer is needed, some of the options for repayment, and whether a special assessment may be considered. Any such transfers must be repaid to the reserve account within one year of the date of the initial transfer.  The one year repayment period may be extended briefly if the board gives the same notice required for considering a transfer and makes a finding, supported by documentation, that a temporary delay in repaying the amount borrowed from reserves would be in the best interests of the association.

The statute, as well as the board members fiduciary obligations, require that the board exercise prudent fiscal management in maintaining the integrity of the reserve accounts. The statute goes so far as to state that the board “shall, if necessary, levy a special assessment to recover the full amount of the expended funds within the [one year]”.

Any board contemplating borrowing from reserve accounts should seriously consider levying a special assessment to recover the amount needed to fund the reserves, and also consider increasing dues to meet operating expenses. In addition, if not already part of the budget, the board should consider budgeting for “bad debt” to ease the impact of late assessments on the overall financial health of the association.  Failure to do so puts the association’s assets at risk, and exposes the directors to claims for breach of fiduciary duties.

Your HOA board was not properly elected. Are its actions valid?

Are the actions taken by a board who may have been improperly elected valid?

VoteAre the actions taken by a board who may have been improperly elected valid?  This question can hamper the governance of an association by calling into question all actions taken by a board where there where some procedural imperfections in the election that seated the board.  California state Senator John Benoit has introduced AB 259 to reslove this issue.  AB 259 is intended to avoid disruption in the governance of an HOA by preventing the voiding of actions taken by a board when the board’s election had some procedural irregularities, unless the court finds that the action of the board was contrary to law or to the governing documents.

Once enacted, this bill should help any board facing a challenge to an election months after the election.