Reserve Disclosures
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RESERVE STUDY DISCLOSURES

Many associations have alarmingly low reserves, which prompted the legislature to increase disclosures and establish funding plans so as to avoid large special assessments. All residential associations are required to perform a reserve study. Boards are required to make the following reserve disclosures:

  1. Deficiencies. Disclose any deficiencies in the reserves expressed on a per unit basis. (Civ. Code §5565(d).)

  2. Deferrals. Disclose whether the board plans to defer repairs or replacement of any major component, including a justification for the deferral. (Civ. Code §5300(b)(4).)

  3. 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. (Civ. Code §5300(b)(8).)

  4. 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. (Civ. Code §5560.) 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. (Civ. Code §5300.)

  5. 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. (Civ. Code §5550(b)(5).)

  6. Form of Disclosures. Prepare and distribute specific reserve funding disclosures that comply with (Civ. Code §5570.) NOTE: : There seems to be some concern over paragraph (3) in the Funding Disclosure Summary, which requires a definitive "yes" or "no" answer regarding future events over which the association has no control. While it is helpful for members to find a clear yes or no answer, boards anxious about potential liability may add qualifying language stating the answer is only a projection. The association's attorney and/or reserve preparer can provide appropriate modifying language. Paragraph (7) also raises questions. It calls for a number of estimates for each of five years. If those estimates appear in the more complete 30-year Funding Plan, that document can be attached, more than satisfying the Paragraph (7) 5-year requirement.

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. Boards should build the cost of the study into their annual budget.

ASSISTANCE: Associations needing legal assistance can contact us. To stay current with issues affecting community associations, subscribe to the Davis-Stirling Newsletter.

Adams Stirling PLC