Transfers Between Line Items
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TRANSFERS BETWEEN LINE ITEMS

Sometimes, associations need to repair/replace a reserve component that failed earlier than had been scheduled in the reserve study. A good example is replacement of the roofs. As a result, insufficient funds are available in the line item for roof replacements. Can the board shift funds from other line items to pay for the repair? Is that considered borrowing?

The short answer is "Yes" the board can shift funds from other components and "No" this is not deemed borrowing from the reserves.

Borrowing is defined by Civil Code §5515(a) as the "temporary transfer of moneys from a reserve fund to the association’s general operating fund to meet short-term cashflow requirements or other expenses..." Transferring between line items within the reserve account does not meet that definition.

Moreover, there is no requirement in the Davis-Stirling Act that associations lock in reserve funds on a component-by-component basis. In other words, the association is not required to have a "roof fund" or a "street maintenance fund." The statute, instead, requires  a "reserve fund." Accordingly, the reserve fund is more accurately a pool of monies available as-needed for significant repairs and/or replacement of the association's major common area components.

Finally, even with the component allocation method, the Davis-Stirling Act allows for the imprecise nature of reserve studies by authorizing adjustments to the study in annual updates in the years between visual inspections on the third year. Not only can components last longer or fail sooner than expected, they can also cost less or cost more to repair than originally projected. As a result, adjustments to line items can be done without the need for constant "borrowing" resolutions in the minutes and notices to the membership.

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