Q: Can our HOA board unilaterally write off borrowing from the reserve account as a bad debt? After the write-off can the board then declare another loan from the reserve account? — D. A., San Diego
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A.: Civil Code Section 5515 authorizes TEMPORARY borrowing from the HOA reserve fund if certain required notifications are made to the membership. However, that money must be repaid within one year of the borrowing per Section 5515(d).
If at the end of that year the HOA needs a TEMPORARY delay in repayment, Section 5515(d) allows a delay in repayment but requires a board issue a written “finding” explaining the HOA’s need for more time. The statute doesn’t allow boards to simply “write off” such borrowing. Remember, while borrowing can be convenient to temporarily meet other HOA needs, until the reserve borrowing is repaid the HOA is in increased financial jeopardy because of that larger deficit in the reserve fund.
Q: How can homeowners protect themselves from mismanagement by the board and by the manager due to their incompetency, negligence in failing to do the recommended yearly maintenance for the past several years, failure to fund our reserve account despite substantial HOA dues increases? — S.S., Pasadena
A: Association boards who refuse to regularly set aside funds into the reserve account are driving their association into an unliquidated insolvency. It’s similar to someone living on credit cards for normal expenses – it’s convenient for a while, but can build to a very painful situation when the bill comes due.
HOAs lacking the discipline to accumulate funds to offset the ongoing deterioration of HOA common area elements will need major special assessments or long-term bank loans when those common area elements need replacement. Association members in condominium projects that are not properly funded will find it harder to obtain good mortgage loans. At some point, homebuyers may recognize that condominiums in underfunded associations could be worth less than their appraised value because traditional appraisals generally do not account for an HOA’s overall financial health.
If your board refuses to follow the law and refuses to prudently set aside funds in the reserve account and follow the HOA’s reserve study recommendations, perhaps the members should search for more disciplined volunteers to staff that board.
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Q: The management company without board approval used reserve funds for operating expenses; can the HOA board sue? — J.M., Tustin
A: Civil Code Section 5510(b) prohibits boards from expending reserve funds except as necessary to fund repairs, restoration, replacement, or maintenance of common area components (or to fund litigation regarding those common area components).
The statute does not mention managers, but that doesn’t mean that managers can expend HOA reserve funds on whatever they choose. Boards, not managers, make those decisions and managers should be carrying out the instructions of the board.
The manager recommends, but the ultimate decision is the board’s to make.
As to what happened in your HOA and whether there may need to be a claim, the board should discuss that with association legal counsel.
For the Davis-Stirling Act official site, go to leginfo.legislature.ca.gov, go to “California Law,” and scroll through the Civil Code.
Kelly G. Richardson, Esq. is a Fellow of the College of Community Association Lawyers and Partner of Richardson Ober LLP, a California law firm known for community association advice. Submit questions to [email protected].
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