Borrowing Defined. Without a vote of the membership, boards are allowed to borrow from reserves to meet short-term cash-flow problems or other expenses. (Civ. Code §5515(a).) Suspending reserve deposits qualifies as borrowing from reserves. Monies allocated to the reserve account are pledged in the reserve funding plan annually published to the membership, as well as the operating budget mailed to all members prior to the start of the fiscal year. Those funds are then collected from the membership for that purpose. Intercepting reserve monies before they are deposited into the reserve account or waiting until after they are deposited produces the same result--reserve monies are being used for non-reserve expenses. Such actions are allowed if done properly.
Notice of Intent to Borrow. Boards are required to give notice of their intent to borrow reserve funds by listing it as an agenda item in its notice of board meeting. The notice must include the reasons the reserve transfer is needed, some of the options for repayment, and whether a special assessment may be considered. If the board authorizes the transfer, the board must issue a written finding, recorded in the board's minutes, explaining the reasons for the transfer, and describing when and how the money will be repaid to the reserve fund. (Civ. Code §5515(c).)
Repay Within One Year. Monies borrowed from the reserves must be
repaid to the reserve fund within one year of the date of the initial
transfer, except that the board may, after giving the same notice
required for considering a transfer, and, upon making a finding
supported by documentation that a temporary delay would be in the best
interests of the association, temporarily delay the repayment. (Civ. Code §5515(d).) Associations are allowed to levy special assessments to replenish reserve funds.
Borrowing for Litigation. Associations are allowed to borrow from reserves to pay for litigation, including construction defect litigation.
Temporary Transfer. The use of reserve funds for litigation is deemed a "temporary transfer" (Civ. Code §5520). When temporary transfers are made, boards must explain to the membership the reasons for the transfer and when and how
moneys will be repaid to the reserve fund. In addition, the funds
must be restored within one year of the date of
the initial transfer. (Civ. Code §5515.)
Reserve for Expenses.
Even though you anticipate litigation expenses next year, they do not
qualify as a reserve item. Reserve accounts are for monies "identified
use to defray the future repair or replacement of, or additions to,
those major components that the association is obligated to maintain."
(Civ. Code §5550.) Legal expenses do not meet the definition of a "component" nor do they meet National Reserve Study Standards.
The appropriate place for anticipated legal expenses is the
association's operating budget. This will likely increase your budget
which may require a dues increase or a special assessment for the next
fiscal year. In addition, even though a temporary delay in restoring
borrowed reserve funds is allowed, boards must exercise prudent fiscal
management in maintaining the integrity of the reserve account "and
shall, if necessary, levy a special assessment" to repay the funds
within one year. (Civ. Code §5515.)
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