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Subject:  Operating v Reserve Funds
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Author Messages
JoeB21
(California)

Posts:19


02/15/2020 1:52 PM  
Can an HOA change the Operating Fund / Reserve Fund percentages after the year has started ?

The budget year started on January 1, 2020.

The HOA is considering a new capital project and they want to pay for this out of the operating funds.

By shifting the amount going into the reserve fund, new funds - $150.000 - to pay for the capital project would now be in the operating fund.

Thank you for your help.

JohnC46
(South Carolina)

Posts:9313


02/15/2020 2:21 PM  
Joe

A budget is a best guess and is not cast in stone. Unless your Covenants/Bylaws require a specific amount be placed in the Reserves, the BOD can reconfigure the budget.
MarkM19
(Texas)

Posts:563


02/15/2020 2:28 PM  
Joe,
They could probably get away with it if no one is watching. I have seen it happen with my last board in Ca. before I was elected. They simply stopped the monthly transfer and used it for operating account funds that were very low due to mismanagement. This was also back in 2008 when the housing crisis hit Ca. very hard.

If they try and do it in your HOA for a capitol improvement project and it is more than 5% of the annual budget they will need voter approval if I am remembering my numbers correctly. If they try and borrow from reserves they must have a short under 1 year pay back plan.
KerryL1
(California)

Posts:7044


02/15/2020 3:54 PM  
How much, Joe, is the HOA contributing to reserves and how much to the op. budget per month for 2020?

You've asked about this previously here, yes?
JoeB21
(California)

Posts:19


02/15/2020 4:47 PM  
Yes - this 'battle' is still going on.

The total funds received from monthly dues is $858,000 per year.

This is being split 51% / 49%.

5% of the $858,000 is $42,900 and the project is $150,000 - much more than 5%

An attorney is telling the board that they are free to make this move without a vote.

I believe that this is wrong.
MarkM19
(Texas)

Posts:563


02/15/2020 6:30 PM  
Joe,
You need to check your CC&Rs. It should have a section dedicated to Capitol Improvements. That is where you will find the answer. Lawyers are overrated in many cases. They will tell you what you want or stay in the middle and let you make the choice the Board wants. If it goes to litigation they get many more billable hours.

I bet I am right because I know that clause was in our Ca. CC&Rs and most HOAs you the same or very similar wording in their Docs.

MarkW18
(Florida)

Posts:717


02/15/2020 7:11 PM  
Capital Improvements can come from the Reserve account, but it MUST be repaid within one year. Typically, capital improvements, ebing they are NEW projects are supposed to come from new funds. Once they are finished they are then added to the reserve assets for future maintenance and repairs.
KerryL1
(California)

Posts:7044


02/15/2020 7:14 PM  
I think the HOA attorney is correct.

So... a total of $858k goes into your operating budget this year. Of it, 51% (or 49%) of the monthly amount is placed in reserves each month. That % (51 or 49%) is stated in the budget letter that want out to all owners.

Since the board doesn't want to increase the overall annual assessments, there is no 5% or any other limit. I believe the Board simply needs to send a revised budget letter to owners saying the monthly "split' going to reserves has changed for 2020 and will only be xx a month or $xx for a few months or whatever. This change will fund a capital improvement comprised of xx, which is needed because xxx.

The decision to make this change to the budget must be voted on by the board in an open meeting. A wise board would hold a town hall meeting before it meets to shift these monthly contributions to explain to owners what the board plans to do.

(there's no requirement in Ca to fund reserves at all.)
MarkM19
(Texas)

Posts:563


02/15/2020 7:28 PM  
Kerry,
I agree that there are not requirements for Reserve funding. If the money is in the reserves it does need to be used for reserve items though. So your suggestion is the easy way to fund the Improvement project legally.

I am not getting the percentage that was originally stated in the OP. 51% and 49% capitol verses reserves seems way out of line. The most I have ever seen any board I was on was 20% going to reserves.
GeorgeS21
(Florida)

Posts:2308


02/15/2020 7:35 PM  
Mark,

Our reserve gets about 25% each year. We have a lot of landscaping and a couple of private roads. All single family houses, though. If we were condo or townhouses would be much greater, I would think.
MarkW18
(Florida)

Posts:717


02/15/2020 7:43 PM  
Posted By KerryL1 on 02/15/2020 7:14 PM
I think the HOA attorney is correct.

So... a total of $858k goes into your operating budget this year. Of it, 51% (or 49%) of the monthly amount is placed in reserves each month. That % (51 or 49%) is stated in the budget letter that want out to all owners.

Since the board doesn't want to increase the overall annual assessments, there is no 5% or any other limit. I believe the Board simply needs to send a revised budget letter to owners saying the monthly "split' going to reserves has changed for 2020 and will only be xx a month or $xx for a few months or whatever. This change will fund a capital improvement comprised of xx, which is needed because xxx.

The decision to make this change to the budget must be voted on by the board in an open meeting. A wise board would hold a town hall meeting before it meets to shift these monthly contributions to explain to owners what the board plans to do.

(there's no requirement in Ca to fund reserves at all.)



You should probably re-read your CCRs. Capital improvements over the 5% threshold must be approved by the owners. They are different ways to pay for it, but owners do have rights!
JoeB21
(California)

Posts:19


02/15/2020 8:14 PM  
The total funds paid by owners is $858,000 - this is then divided into the Operating and Reserve Accounts.
JohnC46
(South Carolina)

Posts:9313


02/16/2020 9:27 AM  
As I read the OP's post, they are not taking money out of the Reserves for a Capital Improvement and if they do, this would be wrong. What I read is they want to divert money directed to Reserves and put it in Capital Improvement. That is not taking money out of the reserves.

I agree with Kerry. Just send out a new budget reflecting what they are going to do.
MarkW18
(Florida)

Posts:717


02/16/2020 9:56 AM  
They can put whatever they want into the reserves, there is no rule for that. BUT, there is a rule that requires membership approval of any CAPITAL IMPROVEMENT over 5% of the annual budgeted expenses. Just because you have the board it doesn't mean you can spend as you like. I have attorney opinions on this. And BTW, the attorney over at davis-stirling.com agrees.

So, the number available without membership approval is between $21,879 and $42,900 depending on the $437580 is really a budgeted expense going into the reserves. It could also have tax consequences.
KerryL1
(California)

Posts:7044


02/16/2020 1:19 PM  

I finally have had time to poke around, including in my CC&Rs (though they are not Joe's CC&Rs) and see as others have pointed out previously, that to raise dues more than 5% in a year for any purpose requires a vote by Owners.

But, in this case there will be no increase at all of the assessments fo 2020 based on the overall budget that owners received notice of before this fiscal year. The total monthly, assessment will remain the same. WithIN that assessment, it all will go into the operating budget instead of about 50% of it being contributed to reserves.

In Joe's case, about $72,000 is the total assessment per month. About half -- $36,000 -- goes into reserves. The board wants to amend this contribution split so that none goes into reserves for the rest of this year to pay for a $150,000 capital improvement. Instead the entire $36,000 will be diverted or reconfigured (JohnC's good words) to the operating budget. In less than 5 months, the capital expense item can be paid for without any increase in dues. NOR is this borrowing from reserves.

I welcome any civil corrections with real citations to my reasoning.

As noted earlier, the board needs to do this mid-year "budget amendment" in an open meeting and a best practices-approach would be to hold a Town Hall meeting to explain the diversion, how long it will last, etc., to owners. The Board certainly should have the letter that goes to owners explaining the amended budget vetted by the HOA attorney who advised them already their plan was OK.

Btw, a different board, let's say one is voted in in this fall, can rescind this board decision.

With a few others, I'm puzzled why the contribution to reserves is so high, Joe. Ours is about 27%. Can you explain? Can you also tell us, Joe, what % funded your reserves are? In other words, has your HOA been paying catch-up with this unusually high funding scenario? And, so to reduce funding to reserves for several months will have a strong negative effect on your reserves?

I'm also curious as to why you object to the board's plan, Joe. Care to share?
MarkW18
(Florida)

Posts:717


02/16/2020 1:30 PM  
Kerry

You might want to read what your favorite go to site says on the matter:

https://www.davis-stirling.com/HOME/Capital-Improvement
MarkW18
(Florida)

Posts:717


02/16/2020 1:50 PM  
Posted By KerryL1 on 02/16/2020 1:19 PM

I finally have had time to poke around, including in my CC&Rs (though they are not Joe's CC&Rs) and see as others have pointed out previously, that to raise dues more than 5% in a year for any purpose requires a vote by Owners.



Actually, that is incorrect. The 5% is for capital improvements and special assessments, based on a percentage of the annual gross expenses. The percentage for dues increase is >20%.

I am wondering if you feel that if your association had an extra say $250,000 laying around, would it be alright to build, say, a exercise room with all the equipment, without a vote of its members. The reason I ask is that some boards think they have that power. I think they cite Article Iii of the Constitution.
KerryL1
(California)

Posts:7044


02/16/2020 3:14 PM  
To both Marks. I neglected the words "special assessments." Any special assessment over 5% of the Budget gross expenses require a vote of the owners.

But in Joe's case, a special assessment is not sought by the Board. So let's stop writing about it.

The advice at Davis-stirling.com is the get the owners' votes anyway on such an expenditure. Decorative or recreational items can be very controversial. Let's say an Owner donates $150,000 to their HOA to be used for a decorative or recreational purpose. The board, of course, must vote to spend it that way. But the board should also have the owners vote on such a feature. I don't think, however, there's any legal requirement.

I imagine this is why Joe's HOA's attorney gave the OK to divert monthly contributions to the operating budget v continuing the monthly contributions to reserves. I'd be great if Joe would let us see this opinion.



MarkW18
(Florida)

Posts:717


02/16/2020 4:17 PM  
I googled and found this from a California HOA.

4.3.7 Capital Improvements. Subject to the terms of this Declaration, the Board may, on its own motion or acting on a petition signed by two-thirds (2/3rds) of the Owners, approve the construction, installation or acquisition of a particular capital improvement to the Common Area and/or the Association Property; provided however, if such Capital Improvement is for the Residential Common Area or the Recreational Facilities situated in the Association Property, then only the consent of two-thirds (2/3rds) of the Residential Condominium Owners shall be required, and if such Capital Improvement is for the Commercial Common Area, then only the consent of twothirds (2/3rds) of the Commercial Condominium Owners shall be required.
KerryL1
(California)

Posts:7044


02/16/2020 4:57 PM  
That CC&R section is from my HOA, MarkW," as you well know since you've been, to use a benign word, "following" me for quite some time. Yeah, kinda creepy.

Anyway, it states, "... the Board may, on its own motion... approve the construction, installation or acquisition of a particular capital improvement to the Common Area and/or the Association Property." This would seem to support H Joe's HOA's attorney's advice. The board can use the method Joe outlined.

IMO, to do so without a Town Hall meeting or even an informal vote by owners is UNadvisable. Overreaching without consulting with Owners and making hugely important financial decisions in secret is the main reason the three incumbents who sought reelection here at the 10/19 Annual Meeting were soundly beaten by two newcomers to the board and by me (I'd taken a year off due to the previous board's secrecy & overstepping). But, of course, MarkW, you know all that.

If Joe isn't alone in his apparent objection to the $150,000 expenditure and/or diversion of monthly assessments form reserves to the operating budget to pay for it, he should gather support to challenge the current board at the next election.

This post, after all is about Joe's HOA, not about me. Perhaps MarkW can address Joe's concerns.

MarkW18
(Florida)

Posts:717


02/16/2020 5:18 PM  
Looking up a HOA through Google is easy, although I know you are not one to do the actual research. Just put what you post into Google.

Anyways, I had already addressed his post two way.

1) As long as the budget and disclosures for 2020 were sent on time, they can change the budget. BUT,
2) If Joe's Capital Project is an improvement and not repair or replacing what's already in the reserve study, then the $150K project will need membership approval.

In you case, you stated the Board can do it, and I am guessing you mean without a vote of the member, BUT your own documents stated otherwise "Subject to the terms of this Declaration, the Board may, on its own motion or acting on a petition signed by two-thirds (2/3rds) of the Owners, approve the construction,
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