Real Estate & Property Law

Raiding Reserves - Capital Improvements - What's What?

Here is a recent, and not unusual, question about spending reserve monies:

"This year the new board approved $________ for [several] projects considered "additional work" and maintaining the [______] of the property. There were no hearings on any and in most cases, done without member knowledge of our expense. Our documents require a written majority vote for additional work (above normal and routine maintenance.)
When questioned the President said a vote was not necessary because the funds were taken from the "Reserve" account and not from the budgeted "operating costs".

This defies corporate ownership! Your professional advice?"

First and foremost, do not consider what appears in this column to be legal advice. Second of all, I do not believe the issues "defy corporate ownership" (whatever that means). I believe from what is presented that there is simply some misunderstanding of appropriate expenditures.

There always is the possibility that there are more facts than those presented to me and I do not profess to give legal advice or opinions about whether some act is right or wrong in a "blind" (or for free).

That said, a board does have the right to approve works or projects that relate to components that appear in the reserve study that the HOA is required to maintain, repair and replace, without going to the members, assuming there is sufficient money available in the reserves for the projects that were approved, or funds in the operating accounts if the work involves maintenance and using operating funds for the maintenance work does not cause a shortage in other areas of the budget. The members are supposed to receive the reserve study each year and can see what components are listed, and what projects are coming up. If the Board is not adhering at all to the reserve study funding and component plans, then certainly there may be some legally improper issue to complain about. Boards are expected to utilize, and review and adjust the reserve study each year, and have a new one performed every three years, as needs are reassessed or conditions change relating to the HOA infrastructure (buildings, streets, etc.)

If, however, the Board is asking for a special assessment from the members to pay for maintainence, or to repair or replace reserve items, and that special assessment exceeds what the Board can legally impose without membership approval (more than 5% of the budgeted gross expenses for the fiscal year), a vote of the members must be taken, and approval obtained, unless of course some emergency exists and the money is needed to repair hazards or other issues that require immediacy. (All the requirements and limitations on assessments are found in Civil Code Section 1366, accessible through my website at http://www.californiacondoguru.com, on the Resources page.)

In case you are confused about what constitutes a "reserve" item and what constitutes a "capital improvement" (new item), you may want to refer back to my blog on September 15 titled: "May A Board Decide To Add A Capital Improvement Without Seeking Owner Approval?"

Full post as published by California Condo & HOA Law on November 17, 2008 (boomark / email).