Ways to Track Spending of Reserves

QUESTION: Our association’s board of directors made an agreement with the developer to resolve construction defects without a lawsuit. The developer agreed to correct some defects, and the association is paying for other defect repairs out of the reserve funds. Our reserve funds are seriously depleted. I would like to know how the money was spent. Can a homeowner have an audit done?

The board of directors did not get the approval of the owners when they negotiated the agreement with the developer. Should they have conducted a vote of the entire membership?

ANSWER: An individual owner can pay for an audit, assuming that the association’s financial records are made available to the auditor. However, an individual owner should not have to pay for an audit.

According to California Civil Code, Section 1365 (b), your association is obligated to provide a year-end financial report if the association’s annual income exceeds $75,000.

The year-end report, prepared by a licensed accountant, can be a review of the financial records unless your governing documents specify that an audit is to be performed. This written report is supposed to be provided to all of the members of the association.

There are other methods of tracking reserve expenditures. You stated that your reserves are seriously depleted, so you must have seen a recent reserve study or a copy of the budget information that includes the amount of funds currently held in the reserves.

By comparing this information with the year-end review prepared by the accountant, you should be able to determine how much was spent during the previous fiscal year.

You are entitled to receive a copy of board meeting minutes, though the association may charge you for the photocopying costs. Reserve expenditures should be noted in the minutes and approved by the board of directors. By reading the minutes, you should be able to see the amount of the expenditures and the companies that are being paid to do the work.

The board should consider the depletion of the reserves when it is planning the budget for the next fiscal year. The reserve funds will need to built up again. If the current replacement value of the major components (roofs, heating and air conditioning equipment, elevators, common-area furniture) is equal to or greater than half of the annual operating budget, the association must have a detailed reserve study performed every three years.

The reserve study shows how much money should be set aside each year so that the funds are available when major repairs are needed.

Your concerns about the board’s wisdom in entering into an agreement with the developer may be valid. However, the board does have the authority to make the decision without putting it to a vote of all the owners. The board’s authority is spelled out in your association’s governing documents. If you read your declaration of covenants, conditions and restrictions, you will find that there are only a few major decisions that require a full membership vote.

Must Minutes Be Mailed to Owners?

Q: I own a townhouse in a 24-unit community association. The five board members meet about every three months. Only the board members know what is going on. I think that the management company should advise all of the owners of any action that is being considered. Shouldn’t the board president and the management company be compelled to distribute the board meeting minutes to the owners?

A: Though all owners should be interested in the workings of their association, the level of interest varies from one owner to the next. You can imagine the cost of photocopying and postage that would be wasted on the distribution of minutes to uninterested owners, Therefore, the association is not compelled to distribute the minutes, but owners are entitled to receive them if they reimburse the association for the reasonable cost of photocopying and distribution.

California law requires that the minutes or a summary of the minutes of all board meetings, except executive (closed) sessions, be made available within 30 days after a meeting occurs. If the minutes are not approved at that time, a draft copy should be provided. At least once a year the association should inform the owners of their right to obtain the minutes.

You have the right to attend the regular board meetings of your association. Members should be informed of the time and place of the meetings at least four days in advance. The law makes an exception for emergency meetings.

How Are Reserve Amounts Decided?

Q: We own a unit in a seven-unit condominium complex. Does the law require that a certain amount be set aside in a reserve account? Is there a method of deciding on the amount that is needed?

A: Even though your association is small, the association is obligated to include specific information about the reserves in the annual budget that is distributed to the owners each year.

To provide that information, the association must identify the major components of the property that the association is responsible to maintain, repair, restore or replace. Then you can identify the current repair or replacement cost, the estimated useful life and the estimated remaining life of each component. You will be able to estimate the total annual allocation needed for each reserve item.

The law does not require that a certain amount be kept in the reserve fund, but the association is required to disclose the method of calculation of the reserve needs and the amount of money that is currently accumulated for future reserve expenditures.

New Owner Should Read the Fine Print

Q: My wife and I just purchased our first home, which is located in a gated community with an association. There are additional phases of the project that are not yet built and the common-area pool and other amenities are not completed.

The real estate agent told us that we would not have to pay the monthly association assessments until the common area was completed, but that is not the case. I had to pay four months of assessments even though the pool will not be completed for a few more months. The security gates were installed only two weeks ago.

The gardener only cares for the lots that are unsold. I believe the builder should pay the gardener and not the association.

I would like to receive the monthly financial report. Where can I go for help?

A: Perhaps you didn’t read the fine print in your contract. If the real estate agent didn’t provide correct information, you have the right to send a written complaint to the developer or file a complaint with the local Board of Realtors or the California Department of Real Estate.

The normal procedures of the Department of Real Estate require that the common areas for each phase are completed when sales begin. As soon as the first lot or unit is sold, all owners are obligated to begin paying the monthly assessment. The developer must pay the assessments for all of the unsold lots or units in the phase unless there is a special subsidy agreement.

When you purchased your home, you should have received a copy of the operating budget and the reserve budget showing how much you were paying for each line item of the budget. This information is part of the Final Subdivision Public Report, which the Department of Real Estate issues when selling is ready to begin. Request this information from the sales office if you didn’t receive it.

If landscape maintenance is not provided for each of the lots, then the cost of maintaining the developer’s lots should be paid by the developer. You have a right to ask questions about this and other matters of concern. The developer’s staff should be glad to answer your questions.

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Hickenbottom is a community association management consultant and a founding director of the California Assn. of Community Managers. She selects questions of general interest for the column and regrets that she cannot respond to all questions received. Send questions to: Condo Q&A;, Box 5068, Thousand Oaks, CA 91360.