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Subject: Minimum Cash Reserve Requirements in California
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Author Messages
SandyK
(California)

Posts:1


06/10/2006 6:49 PM  
I am President of an HOA in California. There are only 9 units. I would like to know if there is a formula somewhere in the California Civil Code that explains how to determine the minimum cash reserve?
WilliamT
(Arizona)

Posts:489


06/11/2006 6:12 AM  
Posted By SandyK on 06/10/2006 6:49 PM

I am President of an HOA in California. There are only 9 units. I would like to know if there is a formula somewhere in the California Civil Code that explains how to determine the minimum cash reserve?


You should be able to view the codes online and look for the planned community lines, but I doubt if you'll find a formula you're asking about.

There are several ways to detemine reserves. There is an excellent book that you can buy from the CAI www.caionline.org The name is "Community Association Finances." It has six chapters devoted to Reserves. I just bought the book for my personal library. However, it would be a good book for the Board's library so all board members, especially for the President and Secretary, to read.

As a rule of thumb using the percentage method, from 0 to 30% funded is weak, 70% is very good. Anything over 70% would be excellent in my opinion.

There is also a good software program where you can do your own reserve planning. After having a professional reserve report done, the board can do an annual update with the software program, and possibly do a professional update every 5 years to make sure you're on track. You can
http://www.src-reservestudy.com/ReserveApp.htm

Bill

RogerB
(Colorado)

Posts:4834


06/11/2006 9:38 AM  
Bill, I went to your link: http://www.src-reservestudy.com/ReserveApp.htm.

$299 seems high to me. For that priceWe do the entire reserve analyses for new clients who have none and at no cost update every three years or sooner if there is a major reserve expense. That is a minor savings in our goal to "save clients more than we are paid"
WilliamT
(Arizona)

Posts:489


06/11/2006 3:13 PM  
Posted By RogerB on 06/11/2006 9:38 AM

Bill, I went to your link: http://www.src-reservestudy.com/ReserveApp.htm.

$299 seems high to me. For that priceWe do the entire reserve analyses for new clients who have none and at no cost update every three years or sooner if there is a major reserve expense. That is a minor savings in our goal to "save clients more than we are paid"



Roger, I think it's great that your company is willing to provide that service because it is a service well needed. More MC's should do that. The labor of inputting the new numbers is probably minimal but saves the client a lot of money. It's the initial setting up that's time consuming. I've been studying our reserves and there are many items in reserve that should be operations and I'm hoping to be able to get those changed.

As for the price of the software, I agree it is high, but it does appear better than the only other software that I could find. If there were a large market for the software they probably would be able to afford to sell it for less, I would assume, but the market for that type of software is probably very small so they probably can't recoup their development costs as fast.

We have a program that a former board member developed but it is in MySql. A current board member has access to a MySql program so he can work with it. If he retires we won't be able to use it because no one else has access to MySql.

Bill
WilliamS1
(South Carolina)

Posts:113


06/12/2006 7:54 PM  
Roger -

I appreciate so much your opinions I thought I would ask you on this. I have read different places including on this forum that it is best if the MC or the board does not do the reserve study. In my opinion it looses as sense of credability with the HO and likely is not as detailed as those done by an outside firm.

Our MC has offered us a quote for $1500 and I have received one other outside quotation for $3000. I am trying to get further quotes to present to our board. We are a 110 unit built in late 70's/early 80's with a club house, pool, pool house, roads, sidewalks, fencing, roofs and exteriors to maintain. Any ideas?

Thanks
RogerB
(Colorado)

Posts:4834


06/12/2006 8:34 PM  
William, some people think it is better to have an outside expert. Reminds me of the saying we used to have when I was in the corporate world. The definition of an expert is someone from outside the company who carries a suit case.

I don't like paying a lot of money for a reserve study that is a guesstimate at best. It is my belief that the Board members and/or the MC may have a more thorough knowledge of what needs replacing, when, and by whom. The cost estimates could go either way depending on the qualifications of the analyst. So what to do? I would interview both and decide. The replacement cost of the items you listed could easily justify the extra $1500.
MarkH6
(California)

Posts:1


11/24/2007 5:13 PM  
70% of what for reserves? Would that be annual projected expenses of
the HOA.
Now the new president is trying to bring the reserves down to 0 with
work done by whoever he alone wants without estimates from other venders
and no assessments. I believe he is getting kickbacks.
JosephW
(Michigan)

Posts:882


11/27/2007 5:37 AM  
A few thoughts about this discussion:

I used to do reserve studies, long before the reserve study industry came into being. I had a good spreadsheet program (no longer available), a basic knowledge of construction and access to construction cost information, along with a reasonable amount of common sense. I stopped doing them when I realized that an association couldn't use my testimony as an expert, if the report was ever called into question in a court. Sorry, Roger, although I don't think there have been any cases to date, I believe that a good attorney for the other side could get your testimony and report tossed because you're not a licensed engineer or architect, therefore not an expert. (Background - I was asked to testify as an expert witness on "sound operations of a condominium association". Even though I had been a manager for number of years, had been an author in CAI's first professional management education program, had been one of the principal designers of their PCAM designation and would have had one of the first PCAM designations if I hadn't joined CAI's staff and left management, had been the first instructor for the PMDP management program, had taught those classes to hundreds of managers around the country, had been a speaker at numerous national and state conferences - the judge refused to let me testify because I didn't have any recognized credentials - so maybe I'm a little sensitive to that argument.)

Ultimately the board is going to be held responsible for the reserve issues. Its up to them to accept or reject any reserve study. If they are comfortable with the management doing them, that's fine by me, but....see above.

Here are some of the problems I have seen with reserve studies (some done internally, some with outside companies)

Unless you have the developers construction details, its often hard to determine the quality and remaining life expectancy of the material. Is it a 10 year, 15 year or 20 year shingle on the roofs? How thick is the road, how deep is the base, what quality of material was used?

People often forget to look down - they forget that the association often owns the water and sewer lines. And they can't determine the quality of the workmanship. But more often than not, they just simply don't add it in.

They often see the big items, but forget what goes with them. Roof replacement also includes gutters, downspouts, and sometimes flashing. I've seen associations remember to reserve for pool re-surfacing, but forget the filter and chemical pump because they were inside a locked room (out of site).

The issue of preventive maintenance can greatly impact a reserve plan. How is it taken into consideration? If you seal the cracks every year, topcoat every few - how is that going to change the need to re-surface a road?

How do you deal with code changes? Some associations take the developer's cost, throw in inflation, and come up with a figure - only to find out that the local government has changed the code requirements since the development was finished, and they now need more money.


Raven's Cove v. Knuppe, to my knowledge, is still the basic case regarding reserves. To quote from the opinion: "Here, the initial directors and officers of the Association had a fiduciary relationship to the homeowner members analogous to that of a corporate promoter to the shareholders. These duties take on a greater magnitude in view of the mandatory association membership required of the homeowner. We conclude that since the Association's original directors (comprised of the owners of the Developer and the Developer's employees) admittedly failed to exercise their supervisory and managerial 𖏪 Cal.App.3d 801] responsibilities to assess each unit for an adequate reserve fund and acted with a conflict of interest, they abdicated their obligation as initial directors of the Association to establish such a fund for the purposes of maintenance and repair. Thus, the individual initial directors are liable to the Association for breach of basic fiduciary duties of acting in good faith and exercising basic duties of good management."

Reserves are a serious issue, one which too many board members cave in to the owners, and underfund.

In California, the law deals with reserves by requiring a written report which identifies all of the major components which the association is obligated to repair, replace, restore or maintain having a remaining useful life of more than two years and less than 30 years as of the date of the study. The report estimates the remaining useful life of each component and the amount of funds the association must set aside each month (Reserves) in order to have the cash available to make all necessary repairs and replacements. It is a cash flow report. California law requires most all associations to obtain a reserve study at least every three years.


I borrowed this from the www.davis-stirling.com web site regarding reserves and disclosure:

"Boards are now required to make the following reserve disclosures:

Deficiencies. Disclose any deficiencies in the reserves expressed on a per unit basis. Civil Code §1365(a)(2)(D)

Deferrals. Disclose whether the board plans to defer repairs or replacement of any major component, including a justification for the deferral. Civil Code §1365(a)(3)(A)

Loans. Disclose whether the association has any outstanding loans with an original term of more than one year, including the payee, interest rate, amount outstanding, annual payment, and when the loan is scheduled to be retired. Civil Code §1365(a)(3)(D)

Funding Plan. Prepare and distribute a funding plan that indicates how the board plans to fund the annual contribution to meet the association's obligation for the repair and replacement of all major components. The reserve funding plan must be adopted in an open meeting. Civil Code §1365.5(e)(5) Beginning January 1, 2009, boards must distribute their reserve funding plan to all members along with the association's annual operating budget, not less than 30 nor more than 90 days before the start of the association's fiscal year. Civil Code §1365(b)

Assessments. If the board determines an assessment increase is required to fund the reserves, the assessment must be adopted in an open meeting and separately from the adoption of the funding plan. Civil Code §1365.5(e)(5)

Form of Disclosures. Prepare and distribute specific reserve funding disclosures that comply with Civil Code §1365.2.5 The form has changed significantly and boards must comply with the new format.

Disclosure Window. The disclosure must be done not less than 30 days nor more than 90 days prior to the beginning of the association's fiscal year. This is an improvement over the old requirement that had a 15-day window for making the disclosure. For other disclosures, see disclosure checklist.

Reasonable Fee. Associations may charge a reasonable fee for copies of the reserve report. Boards may also make documents available in electronic form.

RECOMMENDATION. Boards should not attempt to create their own reserve studies nor should they assign the task to the association's management company, unless the company is qualified to prepare reserve plans. Because of the rising potential liability from improperly funded reserves and inadequate notices, boards should use professional reserve companies for their studies. There are many such companies to choose from and boards should build the cost into their annual budget"



Sandy, here are some resources:

http://www.davis-stirling.com (select Main Index, then scroll down to reserves)

http://www.communityassociations.net/cacondoguru/archives/2007/06/reserves_specia.html

http://www.communityassociations.net/cacondoguru/archives/2005/05/do_reserves_nee_1.html

http://davis-stirling.com/wordpress/?m=200703

http://www.communityassociations.net/cacondoguru/archives/2005/09/hoa_loans_is_a_1.html


Joe


Joseph West
Official HOATalk.com Sponsor
Community Associations Network, LLC
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RogerB
(Colorado)

Posts:4834


11/27/2007 6:52 AM  
Joesph, you make many excellent points with which I agree.
JosephW
(Michigan)

Posts:882


11/27/2007 7:13 AM  
MarkH6

I've just spent a great deal of time doing some research on attorneys using the internet to help with cases. We've recently seen one homeowner successfully sued for libeling her board. I would strongly suggest that you ask hoatalk to delete your post or to allow you to change the last sentence.

Joe

Joseph West
Official HOATalk.com Sponsor
Community Associations Network, LLC
www.CommunityAssociations.net

*See legal notice below (end of page) or go to www.hoatalk.com/legal
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Forums > Homeowner Association > HOA Discussions > Minimum Cash Reserve Requirements in California



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