The California Bureau of Real Estate (CalBRE) issued a warning in 2012 in response to a growing number of HOAs with inadequate reserve funds and the resulting problems encountered by those HOAs and their members (i.e., reduced maintenance capabilities, special assessment problems, declining property values, difficulties in securing loans, etc.). These concerns motivated the California Legislature to, in addition to the pre-existing obligation for HOAs to perform reserve studies, increase the number of disclosures HOAs must make on an annual basis regarding their reserve accounts.
Disclosures
The required reserve disclosures are provided to the association’s membership as part of the association’s annual budget report that is prepared pursuant to Civil Code Section 5300, and include all of the following:
- Reserve Summary – the association’s reserve summary prepared pursuant to Civil Code Section 5565. (Civ. Code § 5300(b)(2).) The reserve summary is used to disclose the level of deficiencies in the association’s reserves expressed on a per unit basis. (See “Reserve Summary.”)
- Reserve Funding Plan – a summary of the reserve funding plan adopted by the board pursuant to Civil Code Section 5550(b)(5). (Civ. Code § 5300(b)(3).) The reserve funding plan indicates the way in which the association will fund the required annual contribution to the reserve account, and includes a schedule of the date and amount of any increases in regular or special assessments that will be needed to sufficiently fund the reserve funding plan. (See “Reserve Funding Plan.”) The summary of the reserve funding plan must also include a notice to members that the full reserve funding plan is available upon request. (Civ. Code § 5300(b)(3).)
- Deferred Maintenance Items – a statement as to whether the board has determined “to defer or not undertake repairs or replacement of any major component with a remaining life of 30 years or less, including a justification for the deferral or decision not to undertake the repairs or replacement.” (Civ. Code § 5300(b)(4).)
- Anticipated Special Assessments – a statement as to whether the board, consistent with the reserve funding plan, “has determined or anticipates that the levy of one or more special assessments will be required to repair, replace, or restore any major component or to provide adequate reserves therefor. If so, the statement shall also set out the estimated amount, commencement date, and duration of the assessment.” (Civ. Code § 5300(b)(5).)
- Reserve Funding Mechanisms – a statement as to the mechanism(s) by which the board will fund reserves to repair or replace major components, including assessments, borrowing, use of other assets, deferral of selected replacements or repairs, or alternative mechanisms. (Civ. Code § 5300(b)(6).)
- Procedures for Calculation and Establishment of Reserves – a general statement addressing the procedures used for the calculation and establishment of those reserves to defray the future repair, replacements, or additions to those major components that the association is obligated to maintain. The statement must include, at the least, reserve calculations using the formula described in Civil Code Section 5570(b)(4), and may not assume a rate of return on cash reserves in excess of two percent (2%) above the discount rate published by the Federal Reserve Bank of San Francisco at the time the calculation was made. (Civ. Code § 5300(b)(7).)
- Assessment and Reserve Funding Disclosure Summary form – the annual budget report (whether delivered in full or in summary form) must also be accompanied by the Assessment and Reserve Funding Disclosure Summary form that is prepared pursuant to Civil Code Section 5570. (Civ. Code § 5300(e).)
Disclosure Timeframe
The above disclosures that are included within the annual budget report must be distributed to the association’s members within thirty (30) to ninety (90) days before the end of the association’s fiscal year, regardless of any provisions to the contrary contained in the association’s governing documents. (Civ. Code § 5300(a).)
