A HOA board is generally prohibited from spending reserve funds “for any purpose other than the repair, restoration, replacement, or maintenance of, or litigation involving the repair, restoration, replacement, or maintenance of, major components that the association is obligated to repair, restore, replace, or maintain and for which the reserve fund was established.” (Civ. Code § 5510(b); See also “Reserve Account Expenditures.”) Notwithstanding that limitation, the board may, without membership approval, authorize the temporary transfer of funds from the reserve account to the association’s operating account in order to “meet short-term cash flow requirements or other expenses.” (Civ. Code § 5515(a).) The procedure through which the board may validly authorize such a transfer is subject to the following requirements:
Notice of Intent to Borrow
The board must first provide notice of its intent to consider the transfer (borrowing) of reserve funds in a notice of board meeting. (Civ. Code § 5515(a).) The notice must include the reasons the transfer is needed, some of the options for repayment, and whether a special assessment may be considered in order to repay the borrowed funds. (Civ. Code § 5515(b).)
Written Finding Explaining Reasons for Transfer & Describing Repayment Method
If the board authorizes the transfer, the board must issue a written finding explaining the reasons the transfer is needed, and describing when and how the transferred funds will be repaid to the reserve account. (Civ. Code § 5515(c).) This written finding must be recorded in the minutes of the board meeting. (Civ. Code § 5515(c).)
Restoration of Funds within One (1) Year
The transferred funds must be restored to the reserve account within one (1) year of the date of the initial transfer. (Civ. Code § 5515(d).)
Exception: Option to Temporarily Delay the Restoration
Notwithstanding the above, the board may, after giving the same notice required for considering the transfer, temporarily delay the restoration. (Civ. Code § 5515(d).) Such a decision must be based upon “a finding supported by documentation that a temporary delay would be in the best interests of the common interest development.” (Civ. Code §5515(d).)
Reserve Funds for Litigation
When the decision is made to use reserve funds or to borrow reserve funds in order to pay for litigation “involving the repair, restoration, replacement or maintenance” of major components for which the association is responsible (i.e., construction defect litigation), the association is required to provide general notice of that decision, and of the availability of an accounting for those litigation expenses. (Civ. Code § 5520(a).) Additionally, the association is required to make an accounting of expenses related to the litigation on at least a quarterly basis, unless the governing documents impose more stringent standards. (Civ. Code § 5520(b).) The accounting must be “made available for inspection” by the association’s members at the association’s office. (Civ. Code § 5520(b).)
Special Assessment Concerns
The board must “exercise prudent fiscal management in maintaining the integrity of the reserve account, and shall, if necessary, levy a special assessment to recover the full amount of the [transferred] funds” within the time limitation discussed above. (Civ. Code § 5515(e).) Any such special assessment is subject to the limitations contained in Civil Code Section 5605 (i.e., the special assessment may not exceed five percent (5%) of the association’s annual budget without membership approval). (Civ. Code § 5515(e); See also “Limitations on Assessment Increases.”) The board has the discretion to extend the date the payment on any such special assessment is due, and any extension does not prevent the board from enforcing the collection of an unpaid special assessment. (Civ. Code § 5515(e).)
