An association’s “reserve account” means both of the following:
“Moneys that the board has identified for use to defray the future repair or replacement of, or additions to, those major components that the association is obligated to maintain.” (Civ. Code § 4177(a).)
“The funds received, and not yet expended or disposed of, from either a compensatory damage award or settlement to an association from any person for injuries to property, real or personal, arising from any construction or design defects.” (Civ. Code § 4177(b).)
The reserve account is thus separate and distinct from the association’s operating account that contains funds used to carry out the association’s day-to-day operations.
Withdrawal, Spending & Disclosure Requirements
Boards are required to “exercise prudent fiscal management in maintaining the integrity of the reserve account.” (Civ. Code § 5515(e).) Failing to do so could not only jeopardize the financial viability of the association and the property values of its members, but could also constitute a breach of the board’s fiduciary duties. (Raven’s Cove Townhomes, Inc. v. Knuppe Dev. Co. (1981) 114 Cal.App.3d 783, 800-801.)
Associations are therefore subject to numerous statutory requirements that serve to:
- Limit the purposes for which funds may be expended from the reserve account;
- Regulate the procedure through which a board may authorize the temporary transfer (borrowing) of funds from the reserve account without the membership’s approval; and
- Require every association to perform a reserve study, and to then use that information to prepare a reserve funding plan and make various reserve disclosures to the association’s membership.
Related Case Law
- Raven’s Cove Townhomes, Inc. v. Knuppe Development Co.
(1981) 114 Cal.App.3d 783
[Fiduciary Duties; Reserve Account] A HOA board’s failure to properly fund a reserve account constituted a breach of their fiduciary duties to the HOA and its members.