QUESTION: 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 roofs. An early failure means 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?
ANSWER: Yes, the board can reallocate funds from other components into the roof line item to ensure sufficient funds are available to replace the roofs. This is not considered 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 cash flow requirements or other expenses..." Using available reserve funds to handle the early failure of a component does not meet the definition of borrowing.
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.
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.
